Week ending 26th January 2024.

It was a busy week for markets with plenty of economic data to digest as well as central bank interest rate decisions.

Data showed a robust uptick in business activity in the US in January with both services and manufacturing activity accelerating. Composite PMI reached a seven-month expansionary high of 52.3. The manufacturing and services activity index came in at 50.3 and 52.9 respectively.

There was more positive data as the US economy expanded at an annualised rate of 3.3% in Q4 2023 surpassing expectations of 2%, buoyed in part by consumer spending (rising 2.8%).

Core Personal Consumption Expenditure (PCE) inflation, the Federal Reserve’s preferred measure, fell to 2.9% on year in December, the lowest level since 2021 despite strong holiday spending. The data highlights the Fed’s success against fighting inflation and appears to be successfully executing what it terms a “soft landing.” despite concerns surrounding increased borrowing costs and potential economic slowdown.

China’s central bank announced a significant reduction in bank reserves this week, providing reassurance to global investors. The People’s Bank of China (PBOC) soon plans to cut rates by 50 basis points (bps), marking the most substantial reduction in two years, affecting the amount of cash banks are required to hold as reserves. The move is expected to enhance liquidity for property developers and markets reacted positively with the Hang Seng rebounding nearly 4%, sending strong signals of support after poor performance on Monday.

Turning to the UK, signs of economic resilience opted investors to reduce bets on Bank of England cuts. Composite PMI for January surged to 52.5 and services PMI exhibited robust growth, reaching an impressive 53.8. On the manufacturing front, the UK manufacturing PMI outperformed expectations at 47.3, remaining in contraction territory. The positive momentum faces challenges as supplier delays attributed to disruptions in manufacturing supply chains were noted, marked by increased freight wait times following delays in the Red Sea shipping route.

FTSE 100 surged on Friday following positive news about the latest Consumer Confidence Index. Consumer attitudes reached their highest level in two years, with the index improving to -19 in January, up from -22 the prior month and -24 in November.

The European Central Bank (ECB) chose to keep current interest rates unchanged at the latest policy meeting this week, with Christine Lagarde, the ECB President, emphasising that interest cut decisions were premature – which underscores the institution’s commitment to being data-dependent.

Data this week also confirmed that Ireland entered a recession over the last year as expected. GDP fell by 3.40% on year in Q4 of 2023. Higher interest rates pressure the profitability of large multinational companies, strongly impacting Ireland’s GDP due to the large impact of output from foreign-owned multinational companies established in the country. Despite this economic downturn, the domestic economy exhibits significant resilience.

Coming up next week is the US Federal Open Market Committee (FOMC) meeting where the prevailing expectation is for interest rates to remain unchanged. As usual the spotlight, will be on Jerome Powell’s press conference, closely monitored for any signals of a hawkish or dovish stance.

US consumer confidence, non-farm payrolls, and durable goods orders are also expected. Additionally, Q4 corporate earnings season will be in focus. Tech giants, including Apple, Amazon, Microsoft, Alphabet, and AMD, are among those set to disclose their financial results.

Also coming up are Euro area Q4 GDP CPI figures and preliminary data on Germany’s Q4 GDP. In China, focus shifts to the Manufacturing PMI and Caixin Manufacturing PMI, providing insights into the country’s industrial sector performance.

Kate Mimnagh, Portfolio Economist