What happened? A high-level overview
In our FY2023 investment update, we highlighted certain themes were keeping us on our toes, such as persistent inflation and the likelihood of higher interest rates for longer. Despite this, investment markets were doing well early in the quarter as economic data showed inflation was retreating from high levels, and economic growth still remained robust in the face of high interest rates.
However, market sentiment later turned negative, as data showed central banks still had work to do to get inflation back to acceptable levels. This was particularly the case with oil prices remaining high. At their September meeting, the US Federal Reserve (the US central bank) raised their expectations for interest rate levels through 2024. As a result, markets now anticipate the US will not reduce interest rates until the second half of 2024. The European Central Bank also increased their deposit rate to 4%, their highest level since the Euro was introduced in 1999.
The prospect of higher interest rates for longer led bond and share markets to fall together – a combination that generally only happens during times of high inflation. Share markets were rattled by weaker expectations for economic growth and bonds also struggled as their prices also tend to decline with higher rates.