Market report: Eyes on the Fed interest rate decision, China’s factory slowdown and We Work’s impending implosion
- Caution ahead of Fed’s decision on interest rates as policymakers are expected to keep their finger on the pause button.
- Fresh data underlines slowdown in China’s manufacturing sector.
- UK house prices rise in October amid a shortage of homes for sale.
- WeWork is expected to file for bankruptcy, as the hyped-up business model implodes.
Susannah Streeter, head of money and markets, Hargreaves Lansdown:
‘’Caution has crept back, ahead of a key Federal Reserve decision on interest rates, as signs of China’s faltering economy loom back into view. The FTSE 100 is set for a lacklustre early session, with little data around to spark a rebound.
Fed interest rate decision
All eyes will be on the Fed later, as policymakers decide on interest rate policy, and while the pause button is expected to remain pressed, the possibility of another rate hike is set to remain on the table. Fed Chair Jay Powell’s comments will be closely scrutinized for indications of just how long rates are set to stay higher, given the resilience of the US economy. Equities have rallied in the last few sessions, but renewed wariness is set to slink in on Wall Street ahead of the rates decision. The effect of the rapid ratcheting up in rates has still yet to be felt through the wider economy. Bond prices remain under pressure, and yields high, as investors demand more to hold government debt, given worries about ballooning deficits and still worrisome inflation. US 10-year Treasury yields have inched down a little as borrowing requirements slightly undershot expectations, but they are still at highs not seen since the summer of 2007.
UK house prices rise in October.
The effect of high interest rates is showing up again in the UK. Many would-be buyers are reluctant to move, given the lack of affordable mortgage deals, so there are fewer houses on the market, which has driven up house prices in October. The data from Nationwide showing a rise of 0.9%, may on the face of it, appear to show the housing market is in better shape, but it is more indicative of homeowners staying put rather than swallowing sharply higher borrowing costs. The market is set to stay in the deep freeze while interest rates stay high or there’s more of a shift down in house prices, making them more affordable to first-time buyers in particular.
China’s manufacturing slowdown
More data has come through in China, indicating that the manufacturing sector has struggled unsuccessfully to hang onto growth. The Caixin S&P PMI data showed that factory activity contracted in October, amid weaker demand globally. The knock-on effect of the era of high interest rates in major markets has taken hold and as consumers tighten their belts, and companies re-assess inventories and future needs, export orders keep shrinking. Concerns about global growth continue to weigh on the oil price, with Brent Crude steadying at $85 dollars a barrel. Supply concerns appear to have eased despite ongoing violence in the Middle East, and the worsening humanitarian crisis, with hopes still remaining that the conflict may be contained.
WeWork’s impending implosion
A sorry end is in sight for the high gloss, hyped up house of cards, otherwise known as WeWork. The office space company, which once boasted a valuation of $47 billion, is expected to file for bankruptcy this week. The company was heralded as ‘the future of the office’, but essentially its business model hinged on taking on long leases and renting them out short term. It gained the support of the Japanese conglomerate Soft Bank, which has already had to swallow a staggering loss, having poured in billions of dollars to prop up the company after its initial investment.
Although the façade had started to be chipped away to reveal big losses and high debts before the pandemic, the Covid-crisis put paid to its already weak business model. As freelancers and small business owners got used to working from home, and saving on office costs, its potential customers started evaporating. It did manage to list in 2021 and had offices in around 600 locations globally. But in August this year, the company cited substantial doubts about the company’s ability to operate as a going concern and now this impending implosion looms. The story of WeWork is a cautionary tale to not believe the hype and to look deep under the bonnet of a company and the wider sector, before investing.”
