Week ending 1st March 2024.

As you can see from the accompanying table it was a mixed week for markets.

The heavily anticipated US PCE on Thursday matched expectations. Markets reacted positively as the core PCE rate which is the Federal Reserve’s preferred inflation gauge cooled to 2.8% on year in January down from 2.9% December 2023. On month prices increased by 0.4% in January, keeping mid-year interest rate cuts on the table. The data provided a reassuring contrast to the Labour Department’s earlier consumer price index report. The latter had shown core prices exceeding predictions at 3.9%, sparking concerns.

The path towards the 2% target is turning out to be a bumpy ride after markets were initially over optimistic pricing in aggressive rate cuts. We have always highlighted that policymakers remain data dependent; their primary goal is to achieve price stability. Disinflation momentum has slowed in recent months highlighting the Fed’s apprehension to cut rates until they are confident that inflation is moving towards the 2% target. Data this week also revealed the latest estimate of Q4 GDP was revised down slightly to 3.2% from 3.3%. Policymakers will continue to hold restrictive rates as they await further evidence that the labour market and wages are moderating.

Looking to Europe, inflation declined to 2.6% on year in February 2024, down from the 2.8% in the previous month. The figure was above market expectations of 2.5%. The core rate which excludes volatile items such as food and energy prices moved lower for the 7th consecutive month to 3.1% , but again came in forecasts of 2.9%. Inflation in Ireland rose by 2.2% year-on-year in February 2024, slowing from a 2.7% increase in January.

The European Central Bank (ECB) will be taking note as it charts its course of policy for the remainder of the year. With many of the bloc countries stagnating or dipping into a recession, markets are expecting rate cuts in June, however, the ECB is unlikely to cut rates before the Fed.

Meanwhile in China manufacturing activity in February contracted, but non-manufacturing PMI rose to the highest since September last year. The country continues to grapple with its persistent property crisis, despite Beijing’s concerted efforts to stabilise the sector. The latest developments reveal intensifying pressure on policymakers to escalate support measures. In a bid to inject liquidity into the market, Chinese banks approved over ¥200 billion of development loans on Friday. Also in China, the National People’s Congress will open its annual session on the 5th March. Global markets will be waiting in anticipation as over 3000 delegates will meet over two weeks to set the political agenda for the year ahead. Premier Li is expected to set a growth target of around 5% for 2024 — the same as last year — to keep China on a path towards President Xi Jinping’s goal of roughly doubling the economy by 2035.

Coming up next week data wise, UK retail sales, services PMI from the US and across Europe, US factory orders and Fed Chair Powell’s Testimony. On Wednesday 6th March Chancellor Jeremy Hunt will unveil the Spring Budget. Hunt has teased the possibility of introducing tax cuts stating his intention to chart a course toward a lower-tax economy. Towards the end of the week, we have the ECB’s interest rate decision as Chinese trade data.

Kate Mimnagh, Portfolio Economist