US Nonfarm Payrolls Forecast: February Expected to Add 200K Jobs, Down from January's 353K Surge

Warren Takunda

Central Bank

Economic

Forex

Summary:

February's US Nonfarm Payrolls report is expected to show a gain of 200,000 jobs, down from January's impressive 353,000 increase. The Unemployment Rate is forecasted to remain at 3.7%, while Average Hourly Earnings are projected to rise by 4.4%.

Investors eagerly await the release of the US Nonfarm Payrolls (NFP) report, scheduled for Friday at 13:30 GMT, as the labor market data from the United States Bureau of Labor Statistics (BLS) is poised to influence market sentiment and potentially shape the trajectory of the US Dollar in the coming weeks.

US Nonfarm Payrolls Forecast: February Expected to Add 200K Jobs, Down from January's 353K Surge_1

Following January's stellar performance, where the US economy added an impressive 353,000 jobs, expectations for February's NFP gains are more subdued, with forecasts suggesting a more modest increase of around 200,000 jobs. Additionally, the Unemployment Rate is anticipated to hold steady at 3.7% for the reported period, while Average Hourly Earnings are projected to rise by 4.4% year-on-year, slightly slower than the 4.5% increase recorded in January.

The significance of the NFP report lies in its potential impact on the Federal Reserve's monetary policy decisions. Fed Chair Jerome Powell's recent comments during his testimony before the House Financial Services Committee hinted at the possibility of interest rate cuts in the coming months if there is further evidence of falling inflation. Currently, markets are pricing in a 75% chance of a rate cut by June, up from 63% just a day earlier, according to the CME Group’s FedWatch Tool.

Previewing February’s jobs report, analysts from TD Securities (TDS) expect some moderation in job gains compared to January's strong figures. However, they anticipate mixed signals from the data, indicating a labor market that remains tight but has yet to fully impact wage growth.

In the private sector, the US added 140,000 jobs in February, slightly below expectations but still an increase from the previous month. Meanwhile, the number of job openings stood at 8.86 million at the end of January, slightly below market forecasts.

As investors brace for the release of the NFP report, market participants will closely monitor its impact on the EUR/USD pair. Loosening US labor market conditions and Powell’s dovish comments have recently pushed the US Dollar to one-month lows against major currencies, including the Euro. However, a stronger-than-expected NFP print and robust wage inflation data could reverse this trend, providing support for the US Dollar while exerting downward pressure on the Euro.

US Nonfarm Payrolls Forecast: February Expected to Add 200K Jobs, Down from January's 353K Surge_2

From a technical standpoint, the EUR/USD pair currently faces downward pressure after reaching the 1.0960 level, with stochastic indicators signaling negativity. However, the bullish trend scenario remains intact, supported by an inverted head and shoulders pattern on the chart. Breaking above 1.0960 could confirm further upside towards 1.1080, while caution is advised during the release of the NFP and unemployment data, which may trigger heightened volatility in currency pairs and commodities.

In summary, while expectations for February's NFP gains are more modest compared to previous months, the report remains a key determinant of market sentiment and could influence the direction of the US Dollar in the near term.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

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ING

Economic

Central Bank

Commodity

Energy

Metals: China buys more gold

Last month, China's central bank added gold to its reserves for a sixteenth straight month. The People's Bank of China now owns 72.58 million troy ounces, equivalent to about 2,257 tonnes, after adding about 390,000 troy ounces last month. Central banks bought 1,037 tonnes of gold last year, just shy of the all-time high of 2022, as shown by data from the World Gold Council, as reserve diversification and geopolitical concerns pushed central banks to increase their allocation towards safe assets.

In the Chinese domestic market, buyers have also flocked to gold amid the country's economic woes. Swiss exports to China, which are usually a good indication of Chinese demand for the precious metal, more than doubled in January from December to 77.8 tonnes, while shipments to Hong Kong rose almost sevenfold to 44.6 tonnes, data from the Swiss Federal Administration shows.

Gold tends to become more attractive in times of instability when investors pile into safe-haven assets as a hedge against the economic climate, geopolitical tensions or inflation. We believe this is likely to continue this year.

Meanwhile, gold continues to hover near record highs this morning with prices on track for the biggest weekly gain since October. The latest comments from Fed Chair Jerome Powell suggesting that “the central bank is getting close to the confidence it needs to start lowering rates” has significantly changed the outlook for the Fed rate cut timings this year. We expect gold prices to remain volatile in the coming months as the market reacts to macro drivers, tracking geopolitical events and Fed rate policy.

However, gold ETF holdings continue to decline with total known holdings reporting outflows of 135.4koz to 82.1moz as of yesterday. Net outflows for the month now stand at 285.9koz, taking the total gold ETF holdings to the lowest since December 2019.

Energy: Oil rises on partial suspension of Keystone pipeline

Oil edged higher this morning on reports that TC Energy Corp's Keystone oil pipeline shut operations partially yesterday after pressure dropped on a segment of the pipeline, running from Hardisty, Canada, to Steele City, Nebraska. In the latest update, the company reported that the pipeline is safely operating after a brief suspension, although details on supply disruption are not available yet. The 622Mbbls/d oil pipeline which transports heavy Canadian crude to the US Midwest and Gulf Coast has a long history of disruptions, including a 12Mbbl spill in December 2022, leading to a two-week-long shutdown of the line. The pipeline has been operating at a reduced pressure since the spillage incident.

The latest data from Insights Global shows that refined product inventories in the ARA region increased by 137kt over the last week to 6.03mt. The rise was predominantly driven by fuel oil stocks increasing by 148kt for a fourth consecutive week to 1.64mt, the highest since April 2021. Meanwhile, weekly gasoline stocks also saw a build of 59kt over the reporting week to 1.24mt. However, gasoil stocks in the region fell by 26kt to 2.03mt over the last week.

Meanwhile, data from Singapore shows that total refined products inventory in the country fell by 2.8MMbbls (-6% week-on-week, after reporting gains for three consecutive weeks) to 44MMbbls, the lowest since the week ending on 14 February 2024. The decline was led by residual fuels with inventories falling by 1.35MMbbls for a second consecutive week to 19.14MMbbls/d for the week ending on 6 March 2024, the lowest since the week ending on 6 December 2023.

For natural gas, the EIA reported an inventory withdrawal of 40Bcf for the last week, slightly higher than the market expectations of around 37Bcf withdrawals. However, this was the fifth consecutive undersized draw with the pace of inventory withdrawal remaining below the five-year average fall of 93Bcf, primarily due to warmer-than-normal temperatures over most of the US and higher supplies. Natural gas inventories are up almost 13.6% from the same period last year, while also remaining 31% higher than the five-year average for this time of the year.

Agriculture: Brazil soybean exports rise

The latest data from Brazil's Trade Ministry shows that soybean exports from the nation jumped by 31.7% year-on-year to 6.6mt in February, compared to 5mt for the same period last year. The rise was led by the higher availability of soybeans at competitive rates in Brazil, due to a record crop season last year. Among other grains, corn exports from the country fell 24.7% to 1.7mt last month.

The USDA's weekly net export sales report shows that soybean shipments stood at 680kt for the week ending on 29 February, much higher than the 160kt a week ago and 149kt for the same period last year. This is also higher than the average market expectation of 338kt. Similarly, US wheat export sales rose to 335kt, marginally higher than the 322kt reported a week ago and almost flat from 337kt reported a year ago. The market was expecting a number closer to 395kt. In contrast, US corn shipments stood at 1,110kt, lower than the 1,247kt a week ago and 1,525kt reported a year ago but higher than the average market expectations of 1,050kt.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

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Devin

Forex

In the past four days, the trend of the EUR/USD has started to take an abrupt turn from a medium-term corrective downtrend phase from the 28 December 2023 high of 1.1140 to the 4 February 2024 low of 1.0695 (a total of -442 pips/-4% decline) to evolve into a short-term uptrend phase at this juncture.

Broad-based US dollar weakness

Fig 1: 1-month rolling performances of the US dollar against major currencies as of 8 Mar 2024 (Source: TradingView, click to enlarge chart)

The US dollar has plummeted across the board as measured against the major currencies reinforced by another round of renewed weakness in both the 2-year and 10-year US Treasury yields which in turn reduces the US Treasuries yield premium over other sovereign fixed income.

Based on the current one-month rolling performance, the US dollar has plummeted to a one-month low against the EUR with a loss of -1.5% (see Fig 1) that led the EUR to share the second-best performing major currency ranking together with the GBP when measured against the US dollar.

The US 10-year Treasury yield has declined by 28 basis points in the recent two weeks from its 4.33% key major resistance and broke below a former 4.14% key near-term support which also coincided closely with the 200-day moving average. Right now, the US 10-year Treasury yield is trading at 4.07% at this time of the writing.

US NFP consensus estimate for February is set at a lower print of 200K

One key risk event to take note of today before we wrap off for this week will be the all-important US jobs number, the non-farm payrolls data (NFP) for February. In the prior two months, the US job market has been robust where both data prints (December 2023 and January 2024) have managed to beat expectations that in turn form the current bias of “no in the rush to cut interest rates mantra” among Fed Chair Powell and his colleagues in the US Federal Reserve.

The consensus estimate for today's US NFP release is pegged at a rather low bar of 200K jobs added for February which is below 353K in January. Therefore, the actual NFP data release later may surprisingly overshoot to the upside (easily) which may spark a potential minor mean reversion rebound scenario for the US dollar.

Watch the 1.0970 key short-term resistance on the EUR/USD

Fig 2: EUR/USD short-term trend as of 8 Mar 2024 (Source: TradingView, click to enlarge chart)

Yesterday's (7 March) burst up of +89 pips/+0.8% to print an intraday high of 1.0956 on the EUR/USD after a retest on its 50-day moving average ex-post ECB monetary policy decision has led to a bearish divergence condition seen on the hourly RSI momentum indicator at is overbought region.

These observations suggest an increased risk of a potential minor mean reversion decline for the EUR/USD at this juncture within its short-term uptrend phase where price actions have surpassed its 20-day, 50-day as well as 200-day moving averages on the upside.

If the 1.0970 short-term pivotal resistance is not surpassed to the upside, the EUR/USD may see a minor slide to expose the next near-term support zone of 1.0890/0870 (also the 50-day moving average).

However, a clearance above 1.0970 invalidates the minor mean reversion decline scenario for a continuation of the impulsive upmove sequence within its short-term uptrend phase for the next near-term resistances to come in at 1.1000 and 1.1040.

Source: MarketPulse

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FastBull Featured

Remarks of Officials

Following the European Central Bank's interest rate decision, President Christine Lagarde held a press conference, outlining the following key points:

Based on our current assessment, we consider that the key ECB interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution to this goal. Our future decisions will ensure that our policy rates will be set at sufficiently restrictive levels for as long as necessary.

The economy remains weak. Consumers continued to hold back on their spending, investment moderated and companies exported less, reflecting a slowdown in external demand and some losses in competitiveness. However, surveys point to a gradual recovery over the course of this year. As inflation falls and wages continue to grow, real incomes will rebound, supporting growth.

The unemployment rate is at its lowest since the start of the euro. Meanwhile, employers are posting fewer job vacancies, while fewer firms are reporting that their production is being limited by labour shortages.

Domestic price pressures are still elevated, in part owing to robust wage growth and falling labour productivity. At the same time, there are signs that growth in wages is starting to moderate.

Following Lagarde's remarks, she answered questions from reporters, primarily as follows:

Q1: Have you discussed perhaps doing too much (meaning excessive tightening, or maintaining a restrictive level for too long) inside the Governing Council, and by that, risk that inflation is going to undershoot the target at some point in time?

A: There is a definite (inflation) decline which is under way, and we are making good progress towards our inflation target. And we are more confident as a result. But we are not sufficiently confident, and we clearly need more evidence, more data. We will know a little more in April, but we will know a lot more in June.

Q2: Just to follow up since you said you will know a lot more in June. Was this the majority view in the Governing Council that you will not have enough information in April to be ready for an interest rate cut?

A: There was general broad agreement about the fact that we will get a lot more data and a lot more information in June. That's a certainty. There was also a very broad agreement around the fact that we will not change our views on one single data [point]. And what we are seeing in the data at the moment is indicating certain movements that are directionally good, but it is not strong enough and durable enough, for the moment, to give us sufficient confidence.

Q3: Even if the decision was unanimous, did anyone at the Governing Council suggest cutting rates today? Is there a huge difference between cutting rates in April or doing so in June? I mean both in terms of economic pain but also given the amount of data that you will have for that decision. Is there really a difference?

A: So first of all, we have not discussed rate cuts at this meeting. What we have done is that we have just begun discussing the dialling back of our restrictive stance. But of course we need a lot more information coming in in the next few months to be sufficiently confident. Your second question related to the degree of information. It matters, because we are data dependent, and we are adamant that we will be data dependent.

Q4: Regarding the wage data, you said you don't have enough data for now, but what kind of data do you need to see to be confident enough?

A: When we look at the underlying inflation and the measurement of underlying inflation, there is one obvious outlier in the measurements – and that is domestic inflation, and that is services. So you have to get under the skin of that and determine what it is behind it and what drives it up: clearly it is wages. We are also very attentive to profits. I'm not suggesting that wages should decline or that wage growth should be dampened. I'm saying that it's a major component of services and domestic inflation. Services is moving just a tiny bit – it was at 4% for the last three months and it's moved to 3.9%. Domestic inflation is slightly up. So, we have to be especially attentive to wages.

We will have the Q4 numbers for CPE, for compensation per employee, tomorrow. Our assessment for the moment is: [the CPE was] declining, relative to the third quarter. So we have to look at other indicators as well.

We have our wage tracker, which includes all the agreements that are negotiated and signed. There is about a third of employees covered by that wage tracker whose contracts have already ended or will end at the latest in March.

We look at the Indeed tracker, as everybody does as well, and all these elements are showing us that there is an element of moderation. So growth is moderating. It's not going up as much as it did in late 2022 and in the course of 2023. The fourth element that we also pay attention to is the corporate telephone survey and the SMA, to hear from corporate employers what the labour shortage is and how much hoarding they have, to try to anticipate in a labour market that is still very tight, where wages are going to go.

Q5: How is the current market pricing aligning with your own views? Are you happy with what's been happening in the market? Is this a better reflection of where you think policy might be going?

A: Market views are becoming more aligned with the direction of monetary policy, but monetary policy is not determined by what the market thinks.

Q6: The first question is about the pace at which you're going to be normalising policy once you do start cutting rates. Some of your colleagues on the Governing Council have said they think that it'll be a gradual pace and there's a benefit to doing that. What do you think gradual means in that context? Do you agree with them?

A: We are still in the holding season. We will move to the restrictiveness season, that will take a while. And once that season is over, we will move into a normalisation season. But if that's the definition of gradual, so be it. But I would not commit to any kind of pace, rhythm, magnitude, because we will continue to be data dependent.

Q7: What would the ECB's approach be if we see that inflation remains around this 2.5% area, in the following months. In order words, how much growth are you willing to sacrifice for a small deviation?

A: It's not a question of sacrificing growth. And I would just remind you that, in our projection, while aiming at reaching our target timely and in a sustainable manner, as our projections indicate, we also project recovery during the second-half of 2024 and more importantly, in 2025 and 2026. We stick to our projections. Maybe you have observed that recently we have reduced our errors in our projections significantly and they certainly make us feel more confident, not sufficiently confident yet, but more confident that we will reach the target.

Q8: Unit labour costs are partly being absorbed by profits. In your view, will this continue in the future? And do you think it will be enough to offset the inflationary impact of wage increases?

A: You suggested that unit profits would absorb, or were absorbing all the labour costs. This is not quite the case yet and we have seen some encouraging numbers in the late part of 2023 and earlier part of 2024. We want to see that movement confirmed by both moderation of wages, as we anticipate, but also by the squeezing of profit margins so that the unit profits absorb part of the unit labour costs.

Q9: Investors are betting that the Fed and ECB will both start cutting around June and at a similar pace. Given the different economic landscapes on both sides of the Atlantic, do you think it's reasonable that they should be expecting that with inflation and growth lower in the euro zone?

A: I think I addressed this earlier on when I said that the ECB is an independent central bank and will act independently. We will decide on the basis of the three criteria that I mentioned earlier. On the basis of the measurements that we have, the projections that we have, and the additional data that we need, we will determine what action we need to take. As to whether or not investors are reasonable or not, that's not for me to say. What I hope we can do is being attentive and monitor carefully. Once the data confirms that we are sufficiently confident to reach our 2% target in the medium term and make sure that it will be sustainable, we will act. That's what I can tell you.

Q10: The language that you've used today is similar to what we heard from Fed Chair Jay Powell yesterday, in terms of there being no rush to cut rates. Notwithstanding what you said about your ability to act independently, does it broadly make sense for major central banks to lower interest rates at the same time?

A: I didn't say that there was no rush. I said that we did not discuss cuts for this meeting, but we are just beginning to discuss the dialling back of our restrictive stance, provided that we have enough and certainly more information to be sufficiently confident.

Lagarde's Statement at Press Conference

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Economic

Forex

Commodity

Dollar braces for critical US jobs report

An action-packed week in global markets will come to a crescendo today with the latest US employment report. Nonfarm payrolls are projected to have risen by 200k in February, less than the previous month but still a solid number overall. The unemployment rate is seen holding steady, while wage growth is expected to have lost some steam.

It's crucial to note that the nonfarm payrolls print and the unemployment rate come from two different surveys, which have been flashing conflicting signals for some time. Nonfarm payrolls have risen steadily over the past year, but the number of employed people as measured by the household survey has been almost stagnant during this period.

Hence, the US labor market has started to show some cracks, even if it appears robust on the surface. Investors will be looking for clues as to which of these surveys is correct.

Dollar Gets Smoked Ahead of Nonfarm Payrolls_1

Some early indicators warn that labor market conditions softened in February. The employment sub-indices of both ISM surveys fell into contraction, something echoed in the S&P Global PMIs, where the pace of job creation slowed. That said, there were no signs of mass job losses either, as applications for unemployment benefits remained historically low.

Blending everything together, the tea leaves point to a disappointment in this employment report, but nothing dramatic. The dollar has been pummeled this week as the Fed telegraphed its intentions to slash rates later this year, and any signs the jobs market is cooling could amplify the selling pressure, even if the US economy seems to be in better shape than its counterparts.

Yen recovers on BoJ speculation, euro rises after ECB

Another element behind the dollar's losses this week has been the strength in the Japanese yen, which mounted a comeback as speculation for an imminent Bank of Japan rate increase continues to heat up.

Preliminary results from the spring wage negotiations suggest Japanese workers are on track to receive their biggest pay increase in three decades. Combined with the reacceleration in Tokyo inflation, traders are growing confident the BoJ is about to exit negative rates, assigning almost a 50-50 chance that this could happen as soon as this month.

Meanwhile, the euro rose yesterday after the ECB downplayed the prospect of cutting rates in April, guiding investors for a June cut instead. Even though growth and inflation forecasts for this year were slashed, President Lagarde stressed the need to wait for more data - especially on wage growth - before pivoting.

That said, most of the euro's gains reflected a weaker US dollar as the single currency lost ground against the Japanese yen and the British pound, with the pound receiving support from the euphoric tone in stock markets.

Gold and stocks scale new records

A relentless cross-asset rally has been playing out this year, with stocks, bonds, gold, and bitcoin soaring in tandem. Emboldened by hopes of a soft economic landing and lower interest rates, investors have gone on an epic buying spree, with the fear of missing out and sheer momentum amplifying the moves.

Gold scaled new all-time highs once again early on Friday, bringing its total gains for this month to 6% amid record purchases from central banks, demand from Chinese consumers looking for a hedge, and falling real yields.

With gold now trading in uncharted waters, the next barrier on the upside might be the psychological $2,200 region, although an even bigger test might lie near $2,245, which is the 161.8% Fibonacci extension of the May-October 2023 decline.

Finally, shares on Wall Street hit another record high yesterday, with the tech sector and Nvidia in particular doing the heavy lifting.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

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Warren Takunda

Central Bank

Traders' Opinions

Economic

The euro experienced a decline against major currencies in response to the European Central Bank's (ECB) release of revised inflation forecasts, which hinted at the possibility of an interest rate cut in the near future. The ECB's latest projections suggest a path toward achieving the 2.0% inflation target, leading to speculation among market participants that a rate reduction could be on the cards as early as April.

Despite the dovish tone of the inflation forecasts, the market's reaction to the news was relatively muted. The euro managed to recoup much of its losses, particularly against a broadly weaker US dollar. While the ECB chose to keep its current interest rates and official communications unchanged, it did revise downward its inflation forecasts, citing lower energy prices as the primary reason for the adjustments.

ECB's Inflation Trim Triggers Euro Weakness, But Recovery May Be Imminent_1

The Euro to Pound Sterling exchange rate saw a decline of 0.40% in the early European session, reaching 0.8527 . Similarly, the Euro to Dollar exchange rate dropped to 1.0890 (down 0.30%) before bouncing back to 1.0927. Despite these initial declines, market sentiment remains cautious as investors are wary of the potential consequences of a rate cut on inflation control efforts by the ECB.

In its statement, the ECB noted that "most measures of underlying inflation have eased further, domestic price pressures remain high." The central bank emphasized that achieving the 2.0% inflation target would necessitate keeping interest rates at their current levels for an extended period.

While the ECB's overall economic assessment remains unchanged, the latest round of staff projections resulted in downward revisions to both growth and inflation forecasts. This discrepancy between the ECB's stance on interest rates and its inflation forecasts poses a risk to the central bank's credibility in the eyes of investors.

Market pricing currently indicates a prevailing expectation of a rate hike in June, which could help mitigate any immediate weakness in the euro. However, given the ongoing challenges facing the Eurozone economy and the potential for increased inflationary pressures, the likelihood of a rate cut in April cannot be ruled out. Such a move would likely exert further downward pressure on the euro.

As the ECB adopts a cautious, data-dependent approach to monetary policy, investors remain vigilant about the potential implications for the eurozone economy. While short-term losses may occur, the overall decline in the euro is expected to be limited by the ECB's measured approach to adjusting interest rates in response to evolving economic conditions.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

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Kevin Du

Economic

If the British government is trying to steer more domestic investors back into unloved UK stocks, it has a mammoth task on its hands given the scale of the desertion over recent years.

In his budget speech this week, finance minister Jeremy Hunt unveiled a new "UK ISA", or Individual Savings Account, that allows individuals to invest 5,000 pounds ($6,403) tax-free in UK equities annually, in addition to the 20,000 pounds allowed under existing tax-free ISA schemes.

Hunt reckoned this meant that "British savers can benefit from the growth of the most promising UK businesses as well as supporting them with the capital to help them expand".

Downplaying the impact of the tweak, many experts reckoned the added incentive to stay local would only likely appeal to a small proportion of investors already maxed out on ISA limits.

But what it did serve to do is spotlight just how increasingly unwanted British stocks are even among Britons - who, unlike Americans for example, appear to be abandoning any sense of 'home bias' as they drift away from actively managed UK funds to cheaper and more globally-spread index trackers.

A spiral seems to have ensued as persistently lagging UK performance merely tempts savers further into overseas funds - cutting demand for new UK equity fund launches, which have dwindled in favour of shiny new global offerings instead.

The problems of the British economy over the past decade are well documented of course - not least due to outsize hits from the banking crash of 2008, the protracted and messy exit from the European Union, and the pandemic and subsequent energy shock more recently.

For many global fund managers, UK exposure has become a far less significant part of portfolios and many even bat away questions on the whys and wherefores of British markets.

At its most basic, the startling underperformance of both the blue-chip FTSE100 index of largely globally-exposed UK stocks and the FTSE250 index of mid-sized domestic-facing stocks over the past decade speaks volumes.

In sterling terms, both the FTSE100 and FTSE250 have gained a meagre 13-17% over the past 10 years compared to the 260% boom in Wall Street's S&P500, a near quintupling of the tech-laden Nasdaq, a 140% rise in Japan's Nikkei and even a 62% jump in the euro zone benchmark.

While those major markets surge anew since 2022's interest rate setbacks, UK indexes are still in negative territory for the past 12 months - and also for 2024 to date.

The valuation discount of the FTSE All-Share index versus MSCI's World index is now at a record near 40%, and UK weightings in that World index have more than halved to just 4% over the past 15 years.

It may be 'cheap' of course - but investment flows are streaming in the other direction. UK Equity 'Dark Age' Reflects Alarming Desertion_1

UK Equity 'Dark Age' Reflects Alarming Desertion_2

UK Equity 'Dark Age' Reflects Alarming Desertion_3

"Existential crisis"

Numbers released by the Invest Association on Thursday show the scale of what's happening.

UK savers took 24.3 billion pounds out of all funds in 2023 - the second consecutive year of net withdrawals and the only two such years ever recorded. The relative attraction of higher interest rates in cash savings accounts was partly to blame.

But the really alarming bit is a record 14 billion pound exit from UK equity funds - the eighth straight negative year since the Brexit vote in 2016, outstripping a dire 2022 outcome and continuing a bleed that long precedes the recent rise in interest rates.

While there was some switching to money market and fixed income funds last year, index tracking funds also saw a healthy 13.8 billion of inflows.

It's the whopping 38 billion pound record outflow from actively-managed UK funds that's particularly stark.

And it didn't end last year. Net retail and institutional fund sales of the 1.42 trillion pound industry were both negative at more than a billion pounds each again for January.

"The UK funds industry is going through a dark age," said Laith Khalaf, AJ Bell's head of investment analysis, commenting on the IA figures. "The scale of these withdrawals is absolutely unprecedented."

"This doesn't augur well for confidence in the UK stock market, which is leaking members and performance to overseas competitors," he said, adding that it was an "existential crisis" for UK active funds, where less than a third have outperformed passive equivalents over the past 10 years.

That "crisis" partly reflects worldwide changes in asset management trends toward passive, process-driven and more global strategies - and an exit of many 'star' fund managers from the UK scene. Rising annuity sales, which jumped 46% last year, may also have taken from those seeking UK equities in pension pots.

But there's a clear unwinding of 'home bias' among British investors too, Khalaf noted, showing the share of UK equities in the average balance fund has almost halved since 2009 to just 27% while U.S. equity holdings more than trebled to 39%.

The mere 4% weighting of UK equity in the MSCI World could spell much further reductions ahead if the global index tracking boom continues.

And to the extent that higher interest rates may have exaggerated the issue over the past couple of years, hopes for rate cuts ahead seem unlikely to give the UK much of an advantage over anywhere else this year.

The Bank of England is currently expected to start cutting rates later than its U.S. or euro zone counterparts, around August at current pricing, and also deliver fewer cuts over the course of the year.

Tweaking ISA rules won't do any harm of course, but may just be a cotton wool ball to soak up a flood. UK Equity 'Dark Age' Reflects Alarming Desertion_4