Markets last week
US yields continued to climb following a sustained downtrend in Q4 last year, with 10-year treasuries once again surpassing 4%. Equity markets were mixed, with both the US and Japan managing to haul themselves out of a mid-week lull to finish marginally positive, whilst the UK and European markets ended in negative territory. The Hang Seng dropped more than 5% as weaker than expected data was released from China.
Investors further scaled back their expectations of interest rate cuts, as signs of stickier inflation persisted across several regions. Key economic data released in the US also highlighted stronger than expected retail sales over the Christmas period, and growth in factory production. This follows employment and wage gains reported last month, causing Federal Reserve (Fed) Governor Christopher Waller to describe the economy as “doing well”, and enabling the Fed to “move carefully and methodically” with regard to interest rates.
Other noteworthy US data points released during the week include better than expected housing starts and building permits, while manufacturing (Philly Fed) came in weaker than anticipated, albeit with a stronger composition according to FactSet. Significantly, initial jobless claims were the lowest since September 2022.
Elsewhere, China continued to grab headlines with an uneven recovery. Although GDP growth for 2023 was on target, there was a slowdown in the last quarter. Industrial output, which measures manufacturing, mining, and utilities, was encouraging, growing by 4.6% in 2023. But overshadowing any positives is the fact that China is still grappling with what appears to be embedded deflation, and a slump in its property market. This has weighed heavily on consumer sentiment, which has in turn fed into global demand, most notably within the luxury goods market. For reference, the December headline Consumer Price Index (CPI) came in at -0.3%, which was the third straight month of declines.
Sentiment generally improved by the end of the week, as technology stocks were buoyed by Apple’s upgrade, and broader equity markets breathed a sigh of relief due to lower-than-expected inflation in Germany (Producer Price Index) and Japan (core inflation).
Earnings have remained on course according to FactSet, with over 90% of reports thus far beating expectations, despite more than 50% experiencing a negative immediate reaction – a ‘sell the news’ type scenario.
On the commodity markets, oil made gains due to tensions in the Middle East and the IEA forecasting an increase in demand, with Brent closing in on $79. Iron ore prices declined on the back of weaker Chinese data and the decision of the Central Bank there to retain the medium-term policy rate, which defied market expectations of easing. Gold ended the week 1% lower on the back of stronger US economic data, finishing around $2,030.
The week ahead
Bank of Japan meeting
Our thoughts: Economists expect no change to yield curve controls and the negative short term rate policy. The data, particularly around wage growth, suggests that conditions are not yet right to achieve a sustainable 2% inflation rate. The latest figures show that inflation is indeed slowing and according to Bloomberg, as the output gap (the difference between actual and potential output) remained negative for the 14th straight quarter.
US core PCE deflator US core Personal Consumption Expenditures (PCE) deflator
Our thoughts: Various reports suggest that the Fed’s preferred metric will likely come in at a subdued rate. Bloomberg economists expect the figure to hit 2% by March, predicated on deterioration in the labour market, which should lead the Fed to cut rates thereafter. There are many different factors at play and given the stronger than expected economic data over the past few months, there could potentially be surprises here.
The numbers for the week
Sources: FTSE, Canaccord Genuity Wealth Management