The numbers for the week – 4 Mar 24

The numbers for the week – 4 Mar 24

Markets last week

Analysis
  • Markets were dominated by inflation data last week
  • US Treasury yields stabilised between 4.2% and 4.3%. US equities reached new all-time highs
  • UK gilt yields followed the US trend but ended the week slightly higher. The FTSE All Share was down -0.1%, taking year-to-date losses to -0.8%
  • European equities outpaced their UK counterparts, rising 0.8% in GBP terms. Japanese equities also maintained their upward momentum, rising 2.2% in sterling terms
  • Despite the GDP growth data for the fourth quarter of last year being revised slightly lower, the US economy continued to appear robust. Economists anticipate a cooling of growth this year due to tight monetary policy
  • The Federal Reserve’s (Fed) favoured inflation gauge – the personal consumption expenditures (PCE) price index – was in-line with expectations for January, reassuring markets given the consumer price index (CPI) reading had surprised to the upside
  • In the UK, inflation in stores eased to the lowest level since March 2022, marking a ninth consecutive monthly decline. However, concerns loom over inflationary pressures amidst rising shipping costs, brought on by geopolitical events
  • Inflation in the Euro area fell in February, according to the preliminary CPI data, with service prices declining modestly
  • In Japan, the benchmark inflation gauge exceeded estimates in January, supporting the argument for the Bank of Japan’s (BoJ) policy normalisation, and fuelling speculation that the BoJ might be nearing its first interest rate hike since 2007.
 

Analysis

Global financial markets experienced a week dominated by inflation data. The alignment of global inflation figures, particularly the closely watched US core PCE price index, provided some sense of relief. US Treasury yields showed some stability around the 4.2%-4.3% mark, following a sustained upward trend so far this year. This stability supported US equities, which surged to new all-time highs, reinforced by strong tech sector earnings. The US equity market was up 1.1% last week in sterling terms.

UK gilt yields broadly followed the US trend, although finished the week slightly higher. Despite the stability in rates, the UK equity market was more muted, with the FTSE All Share down -0.1%, taking year-to-date losses to -0.8%. European equities, mirroring the upward trajectory of the US, outpaced their UK counterparts, rising 0.8% in GBP terms. Japanese equities maintained their upward momentum too, rising 2.2% in sterling terms last week.

Despite GDP growth data for the fourth quarter of last year being revised slightly lower last week, it continued to paint the US economy in a mostly robust light. Many economists anticipate a cooling of US growth this year, believing that tight monetary policy will eventually bite, restraining household demand and business investment. However, the consensus remains optimistic where the worst economic outcomes are avoided.

In the US, January’s personal income and outlays report presented a paradox of strong personal income and weak spending. This reflects stark reversal to the recent trend of consumers spending above their means – a mark of the cost-of-living crisis.  The logic of deteriorating household balance sheets causing a softening in spending is a sound one, although analysts are attributing many of these anomalies to one-off factors, including bad weather.

The key data from the US was the Fed’s favoured inflation gauge, the PCE price index. The data for January was in-line with expectations, which was reassuring given that the CPI measure surprised to the upside in January. The main battle ground for most Western central banks, including the Bank of England, is still in services, where price pressures remain too elevated to facilitate rate cuts.

In the UK, according to the BRC Nielsen Shop Price Index, inflation in stores eased to the lowest level since March 2022, marking a ninth consecutive monthly decline. Supply-chain pressures, falling input costs, and intense retail competition were key factors. However, concerns loom over potential inflationary pressures for non-food goods due to rising shipping costs amid geopolitical tensions.

Inflation in the Euro area fell in February according to the preliminary CPI data. Reassuring investors and the governing council of the European Central Bank (ECB) was the fact that service prices declined modestly. This is precisely what policy makers will want to see before they cut rates.

In Japan, the benchmark inflation gauge exceeded estimates in January, supporting the argument for the BoJ’s policy normalisation. Consumer prices, excluding fresh food, rose by 2% year-on-year, surpassing consensus estimates of 1.9%. The unexpected inflation data fuelled speculation that the BoJ might be nearing its first interest rate hike since 2007. The positive market reaction that saw the Yen strengthen, combined with a continuation of the stock market rally, points to the broad investor support for such a policy change. Yen weakness has tempered the returns of the Japanese stock market considerably since 2020.

The week ahead

Wednesday: UK budget

Our thoughts: Jeremy Hunt has little headroom to loosen fiscal policy, particularly given the target to have the UK’s debt burden falling within five years. A reduction in national insurance contributions is likely to form the meat of the Chancellor’s budget.

Wednesday-Thursday: Federal Reserve Chair semi-annual Congressional testimony

Our thoughts: in his forthcoming testimony, Chair Powell is anticipated to underscore the message that, considering the current robust state of the US economy and persistent inflationary pressures, the Fed is not in a rush to ease policy, believing it is premature to do so. Powell may subtly infuse a hawkish undertone in his address, aiming to indirectly bring about further tightening of financial conditions.

Thursday: European Central Bank rate decision

Our thoughts: The ECB is expected to keep rates on hold. In a similar fashion to her US counterpart, Christine Lagarde is likely to reinforce the message that it is still too soon to be cutting rates. Although there is debate on the Governing Council on the timing of the first cut, there is now a consensus that the next move will be to ease. Recent inflation data has shown that it is falling slower than anticipated. European bonds have faced headwinds over concerns that Lagarde may strike a more hawkish tone in the meeting this week.

Friday: US employment report

Our thoughts: Many analysts anticipate that the US labour market softened in February, pointing to several factors including high-profile layoffs across sectors including technology and financial services. Additionally, respondents of the University of Michigan’s consumer sentiment survey in the week before last reported unfavourable news related to unemployment. Wage growth is also anticipated to slow. The Fed would like to see such a softening of the labour market as it would point to subsiding inflationary pressure in the part of the economy that has arguably shown the most resistance.

The numbers for the week

 

Sources: FTSE, Canaccord Genuity Wealth Management

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