The numbers for the week – 29 Jan 24

The numbers for the week – 29 Jan 24

Markets last week

Government bond yields remained relatively stable last week, despite several significant central bank meetings and a lack of major data releases. The central theme for markets continues to revolve around the resilience of the US economy. The S&P 500 reached a new record high but underperformed the UK and European equities. The strength of corporate fundamentals seems to be defying macro challenges, including high interest rates, geopolitical risks, and a weak Chinese economy dragging on global growth.

Chinese and Hong Kong equities performed well following a particularly weak start to the year. China has announced plans to cut the reserve requirement ratio (RRR) for banks within two weeks, lowering it by 0.5 percentage points to inject 1 trillion yuan ($139 billion) into the market. The move from the People’s Bank of China is an unusually early and transparent policy reveal, reflecting the government’s urgency to stabilise the economy. Additionally, regulators introduced measures to support the property and stock markets. Analysts remain uncertain about the broader impact on the economy, and China remains one of the key variables for 2024.

Our expectations for a pushback in the market pricing of rate cuts from central banks has materialised and, despite the positive sentiment, there has been a shift in market expectations surrounding the timing of interest rate cuts. The market-implied likelihood of a US Federal Reserve (Fed) rate cut in March has decreased to less than 50%, down from a peak of 85% just a few weeks ago. The timing of cuts depends largely on how the US economy evolves in the coming months. Potential risks keep a lurking sense of scepticism under the surface, particularly in an environment where there is little consensus on directional views. Despite challenges, the US economy appears robust, with GDP growth for the fourth quarter (advance figure released on Thursday) exceeding economists’ expectations at 3.3%.

The European Central Bank (ECB) maintained optionality by sticking to their current policy, awaiting further developments in disinflation and wage data before making any decisions. The market reaction to the ECB meeting was positive, and analysts noted that the phrase “domestic price pressures remain elevated” was omitted from the policy statement. European equities led the charge last week, delivering 4.2%. The market reaction seemed like a clutching of straws, as when Lagarde was asked about a potential cut in April she stated that disinflation needs to have progressed further, and that the first cut would likely occur in the summer. Investors still anticipate a full rate cut in April, which seem reasonable given recent weak economic data from the eurozone. GDP growth and inflation data this week will be key in determining the timing of the first cut for the ECB.

The Bank of Japan (BoJ) also kept its policy unchanged, but the outlook report and press conference hinted at potential shifts. The inclusion of the phrase “the likelihood of realising the price stability target has continued to gradually rise”, raises hopes of revising inflation measures upward. The press conference was perceived as somewhat hawkish, reinforcing the belief that yields in Japan will continue to rise.

Disruptions in Red Sea shipping are anticipated to keep transport and business costs elevated for the next few months at least. This could result in a bump in the road for the disinflationary trend seen throughout Europe and the UK. Quadrupled shipping rates from Asia to Europe pose an inflationary threat. Although firms are expected to pass on increased costs to consumer prices, weak demand and high inventories may limit the rise. Both Brent and Crude oil prices rose more than 6% last week, predominantly on the back of geopolitical concerns.

The week ahead

Tuesday: eurozone GDP growth

Our thoughts: economists anticipate that the eurozone economy has marginally shrunk in the fourth quarter, as it did in the third. Economic data in Europe has been weak, but not disastrous, and this has facilitated a softening of inflation and optionality for the ECB to cut rates in the first half of this year. The risk is that the data shows a more severe contraction and paints a darker outlook for the European economy.

Wednesday: Federal Reserve rate decision

Our thoughts: the Fed’s preferred measure of inflation (core personal consumer expenditure) for the fourth quarter was released last week and came in at 2%, in line with the Fed’s target. We do not expect any changes to the policy rate, however given the disinflationary momentum, we expect the Fed to be more open in communicating the possibility and timing of rate cuts, as well as the tapering of quantitative tightening.

Thursday: Bank of England rate decision

Our thoughts: the Monetary Policy Committee are likely to hold the policy rate steady at 5.25%. Although the most recent inflationary print in the UK was hotter than expected, the broader trend remains reassuringly disinflationary. The main factor driving the recent pick up was airfares – a volatile component of services inflation. Although inflation seems to be on the right track, it is likely to be a bumpy ride back to the target level, and the Bank of England are unlikely to cut rates without more clear-cut progress.

The numbers for the week


Sources: FTSE, Canaccord Genuity Wealth Management

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