Markets were quiet last week. Global equities recovered a little after four weeks of declines, rising a bit under 1% in both local currency and sterling terms, leaving them down 5.1% and 6.8% respectively from their mid-February high.
Bonds were also little changed and it was left to the gold price to create a bit of excitement. It broke through $3000/oz for the first time, testing $3050 at one point before falling back. Gold ended the week 1% higher and is now up as much as 15% year-to-date.
Gold continues to be buoyed by strong demand from central banks who continue to diversify their reserve holdings away from the dollar, which is less attractive than before due to its vulnerability to US sanctions. The rise in geopolitical and economic uncertainty is also clearly a positive for a safe-haven asset such as gold.
We plan to retain our holdings either in gold itself or gold mining stocks. Both supports for the gold price should remain in place and gold continues to be a good way of diversifying the risk in our portfolios due to its low correlation to both bonds and equities.
Central bank meetings dominated the week with the Fed, Bank of England and Bank of Japan all leaving rates unchanged as expected. As ever, however, the focus was on their forward guidance and all three central banks highlighted the uncertainties surrounding the outlook, particularly as a result of US policy.
The Fed updated its economic projections and reduced its US growth forecast, while upping its inflation forecast. This provoked some overly alarmist talk of stagflation. Its growth forecasts for this year and next were trimmed by 0.2-0.4% but only to 1.7-1.8%. As for inflation, it nudged up its forecast for the core rate by 0.3% to 2.8% for this year but left next year’s forecast unchanged at 2.2%.
The Fed stuck to its recent line that it is in no hurry to change policy, while continuing to forecast rates being cut a further 0.5% later this year. The market is looking for rates to fall 0.75% but this looks optimistic as the upward pressure on prices from tariffs should temper the Fed’s willingness to ease policy.
Worries have surfaced recently that the US could be heading into a recession. Although this cannot be ruled out altogether given the current policy uncertainties (maybe chaos is a better word), it continues to look low risk. Indeed, last week’s stronger than expected gains in retail sales, industrial production and housing activity provided some reassurance on this front.
If there is a stagflation problem, it is rather more in the UK, where growth is set to be significantly lower and inflation significantly higher than in the US, even after the Fed’s revisions. Whilst highlighting the uncertainties, the BOE still believes rates are on a gradually declining trend. The market expects rates to be lowered by 0.5% to 4.0% by year-end but is a bit less confident that rates will be cut at the Bank’s next meeting in early May.
Continued inflation worries are the reason why the BOE is cautious in cutting rates despite the more pressing need to boost growth here than in the US. The latest wage numbers will not have eased such concerns with underlying average earnings growth remaining stubbornly high in January at 5.9%.
As for the Bank of Japan, it plans to continue its recent policy of gradually raising rates back towards more normal levels now that deflation appears to have been vanquished. Rates look set to move up from 0.5% to 0.75-1% later this year.
This coming week, the focus for UK investors at least will be the Chancellor’s fiscal statement on Wednesday. The combination of higher interest rates and a downgrade to the OBR’s growth forecast will have wiped out the Chancellor’s £10bn headroom versus her fiscal rules and very likely left her with a small shortfall. Rather than revise her rules, Reeves appears set on cutting spending, with cuts to welfare and the civil service outlined over the past week.
Elsewhere, it is a relatively quiet week on the data front. We may even have no tariff announcements for the second week running. If so, it is the calm before the storm with Trump set to announce his plans for ‘reciprocal’ tariffs on 2 April.
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