Money Matters 1 March 2023

Markets muted following strong inflation data

Most major indices ended the week in the red as strong economic data dented investor sentiment.

UK and European stocks fell after the US saw a rise in the core personal consumption expenditures (PCE) price index. Investor sentiment was dented by increased fears that persistent inflation could lead to additional interest rate hikes. The FTSE 100 dropped 1.6%, the Dax lost 1.8% and the STOXX 600 fell by 1.4%. The data led US indices to record their worst weekly performance in two months. The S&P 500 slipped by 2.7%, the Dow lost 3.0% and the Nasdaq was down by 3.3%.

Over in Asia, Japan’s Nikkei 225 fell by 0.2% as the country’s annual inflation rate rose to 4.3% in January, its highest reading in over 40 years. China’s Shanghai Composite added 1.3% as increased regulatory support offset concerns about geopolitical tensions with the US. Hong Kong’s Hang Seng dropped 3.4% as a stronger US dollar raised concerns about the strength of China’s economic recovery.

Last week’s market performance*
• FTSE 100: -1.57%
• S&P 5001: -2.67%
• Dow1: -2.99%
• Nasdaq1: -3.33%
• Dax: -1.76%
• Hang Seng: -3.43%
• Shanghai Composite: +1.34%
• Nikkei 225: -0.22%
• STOXX 600: -1.42%
• MSCI EM ex Asia: -3.08%
* Data from close of business on Friday 17 February to close of business on Friday 24 February.
1 Closed on Monday 20 February.

Investor sentiment mixed following EU-UK trade deal

European and UK indices ended Monday’s trading session (27 February) in the green after investor sentiment was boosted by a new deal between the UK and the EU on trade rules for Northern Ireland. However, markets opened in the red on Tuesday as investors scrutinised the deal and awaited regional inflation data from France and Spain.

US indices bounced back on Monday as pending home sales jumped by 8.1% in January, the biggest increase since June 2020. US inflation accelerates in January.

Last week’s economic headlines were dominated by the surprise acceleration in core PCE (excluding food and energy), which is the Federal Reserve’s preferred measure of inflation. The index rose 4.7% year-on-year in January, exceeding economists’ forecasts of 4.3%. On a monthly basis, prices increased by 0.6%, outperforming a predicted 0.4%. This was the highest increase since August.

Consumer spending, which accounts for two thirds of US economic activity, grew by 1.8%, the highest level in almost two years and exceeding a predicted 1.3%. Consumption was boosted by increased spending on motor vehicles, household furnishings and equipment, recreational goods and vehicles, and clothing. The service sector, primarily bars and restaurants, saw a 1.3% jump. Increased spending was also seen across the healthcare, recreation and transport sectors.

The PCE figures – combined with a strong labour market and consumer price and retail spending data released earlier this month – have again stirred fears that further interest rate increases will be necessary to stifle inflation. Investors are now anticipating a rise in the federal funds rate to between 5.25% and 5.5% by July. This is more than half a percentage point higher than the peak that investors predicted in early February.

The PCE report and minutes from the Fed’s most recent policy meeting contributed to a selloff in US Treasury bonds last week, with two-year yields jumping 11.2 basis points to 4.8%, the highest level since 2007. The ten-year bond yield rose 6.9 basis points to 3.9%.

Eurozone inflation cools

Last week also saw the release of inflation figures for the eurozone, which showed price rises eased to 8.6% year-on-year in January, down from 9.2% in December. Economists had predicted a marginally lower rate of 8.5%. Core inflation – excluding energy, food, alcohol and tobacco – grew to 5.3% in January from 5.2% the month before.

Eurozone inflation (% YoY)

Source: Refinitiv Datastream

Inflationary pressures were exacerbated by the continuing Russia-Ukraine war, which has impacted energy and food prices in particular. Prices for food, alcohol and tobacco increased 14.1% year-on-year in January, up from 13.8% in December, whereas energy price gains eased to 18.9% in January from 25.5% in December.

The European Central Bank has promised a half a percentage point interest rate increase in March. Markets are anticipating a further 0.75 percentage point hike this year, which would take the peak rate to near 3.75%.

UK services activity rebounds

Last week’s provisional purchasing managers’ indices (PMI) showed services sector activity in the UK rebounded in February, raising hopes the country could avoid a long recession. The flash S&P Global/CIPS UK composite PMI jumped to 53.0 from 48.5 in January. It rose above the 50.0 threshold that separates growth from contraction for the first time since July. The dominant services sector drove the improved reading, with the services PMI rising to an eight-month high of 53.3. Survey respondents commented on stronger demand for business services amid an improving global economic outlook and reduced domestic political uncertainty.[zuperla_single_image image=”23486″ inherit_align=”left”]

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