Stocks fall as UK interest rates rise: the weekly review

The sell-off was broad, and one better session was not enough

The US decline on 5 November extended beyond technology companies: the Nasdaq Composite fell 5.52% and the broader S&P 500 lost 4.36%. In Japan, the Nikkei 225 dropped 5.96% on 6 November, with 222 of its 225 constituents declining. Such breadth matters even to investors who do not own individual technology shares but hold broad-market funds.

The full-week result remained negative. Between the closes on 30 October and 6 November, the Nasdaq Composite fell 3.37% and the Nikkei 225 lost 9.25%. The US index rose 1.09% on Friday but recovered only part of Thursday’s loss. These are price-index changes excluding dividends, calculated on a yen basis for Japan and a dollar basis for the US, not in euros.

A share that has fallen is not automatically cheaply valued: if expected earnings fall by as much or more, its price-to-earnings ratio may not improve. A lower price offers a better starting valuation only if revenues and profits remain sufficiently robust, not simply because the index has declined. US growth stocks and Japanese equities can fall together despite their different businesses. The next inflation figures and company order updates will help distinguish a reduced appetite for risk from weakening future revenues.

Political uncertainty also matters for data-centre development. On 5 November US Senate Democratic Leader Chuck Schumer set out an intention to protect household electricity bills from costs shifted by data centres. He promised more detail later and acknowledged the possibility of a presidential veto: this was an intention, not an enacted construction ban. If developers and tenants had to shoulder more infrastructure costs, projects could become more expensive and equipment orders could be delayed. The speech and the sell-off occurring on the same day do not, by themselves, establish the cause of the entire move.

US employment and productivity counterbalanced the equity weakness

On 6 November the US Bureau of Labor Statistics reported an increase of 165,000 nonfarm payroll jobs in October. September’s gain was revised to 60,000 and August’s to 186,000, an upward revision of 84,000 across the two months. The previous picture for September was therefore weaker than the latest data now indicate. Unemployment eased from 4.2% to 4.1% of the labour force, although the agency described the change as small.

Private-sector average hourly earnings rose 3.1% over the year, potentially supporting consumer businesses’ sales. For bonds and debt-financed property, however, a more resilient labour market reduces the need for urgent rate cuts to support demand.

Productivity can help reconcile rising pay with company profitability. Preliminary figures released on 5 November showed US nonfarm-business productivity increasing by 3.6% in the third quarter while unit labour costs ? fell by 0.7%. Both are quarterly rates expressed at an annualised pace. This does not mean wages fell: hourly pay and other compensation increased.

This favourable combination did not apply automatically to every sector: manufacturing unit labour costs increased by 2.7% at the same annualised quarterly pace. The relevant question is whether a particular company is genuinely becoming more productive or simply facing higher costs. US consumer-price data on 10 November will help show how much pay growth translates into real purchasing power.

Energy costs raised both bills and interest rates in Europe

On 5 November the Bank of England raised Bank Rate from 3.75% to 4.00%. Eight committee members voted for the quarter-percentage-point increase; one wanted a larger move. The decision matters for UK businesses and households taking out or refinancing loans: lower share prices do not automatically mean cheaper financing.

The Bank forecasts that energy costs will lift annual inflation from September’s 3.5% to around 5% by mid-2027. Evidence of pressures spreading to other prices and pay remains limited, so it makes no commitment to a future rate path.

Euro-area September producer-price ? figures, published on 5 November, highlighted the energy sector’s exceptional move. Industrial selling prices increased by 2.5% over the month, energy prices by 7.8%, and prices across industry excluding energy by just 0.1%. The headline figure therefore does not describe every sector equally.

Higher prices can support energy suppliers’ revenues but squeeze energy-intensive manufacturers’ profits if costs cannot be passed on to customers. UK bonds and property companies also face interest-rate risk. Easing energy pressures would create an opportunity; their spread into pay and services is the risk. The next euro-area producer-price release is scheduled for 3 December.

US bonds showed that portfolio components need not move together

US government bond yields ? ended the week below the previous Friday’s levels. The ten-year measure declined from 4.94% on 30 October to 4.86% on 6 November, a fall of eight basis points. The two-year yield eased from 4.56% to 4.51%, and the thirty-year yield from 5.31% to 5.26%. These changes are not the percentage investment returns on those bonds.

Lower yields can help government bonds offset equity losses, but a longer maturity increases price sensitivity to the opposite move too. Corporate bonds also depend on the issuer’s ability to repay, so they are not an identical counterweight.

On 4 November the Treasury announced a $125 billion refunding offering: approximately $97 billion will replace maturing privately held debt and about $28 billion will raise new cash. Three-year, ten-year and thirty-year auctions are scheduled for 9, 10 and 12 November respectively. Demand will help show whether investors are willing to finance the US at these yields. These are forthcoming events, not results from last week’s auctions.