Market Update – 13th March 2024.

It has been a positive week for markets thus far.

The FTSE 100 reached its highest level since May last year rising by 1% yesterday, driven by optimism arising from the slowdown in wage growth which heightened expectations for forthcoming interest rate cuts.

Investors digested the latest labour market data which showed signs of cooling. UK wage growth continued to moderate, aligning with the Bank of England’s (BoE) desired trend. Average regular pay excluding bonuses showed growth of 6.1% on year in the three months to January, compared to 6.2% in the previous period. Wages are still rising more quickly than inflation which currently stands at 4%.

The unemployment rate saw a modest increase to 3.9% over the same period, slightly exceeding the market consensus of 3.8%. While this data isn’t enough to prompt the BoE to cut interest rates at their meeting next week, it does provide additional reassurance that wage growth and inflation are trending in the desired direction. With the BoE scheduled to convene next week for discussions on the longevity and stability of labour market & inflation trends, there is a growing sentiment that it might not be long before policymakers seriously consider implementing rate cuts.

Positive signs have emerged for the UK’s economic recovery, buoyed by recent data indicating 0.2% growth in January. The upturn in GDP was fuelled by expansions in the service and construction sectors. A notable catalyst behind the 0.2% growth in services was a significant 3.4% surge in spending, both in physical retail stores and online platforms. Additionally, the construction sector saw a robust rise of 1.1%, further contributing to the positive trend. Although there was a slight contraction of 0.2% in production, including manufacturing, the overall trajectory suggests promising prospects for the UK’s economic recovery efforts.

Turning to the US, while hotter-than-expected inflation figures in January spooked markets, yesterday’s report garnered a positive reaction. February’s report surpassed forecasts, with inflation rising by 0.4% compared to the previous month and 3.2% year-on-year, slightly surpassing January’s 0.3% monthly increase and 3.1% annual gain. Surprisingly, the market reacted positively to the report, with the S&P 500 closing up 1.12%.

While the annual core rate was above expectations, it still came in under January’s figure, thus failing to derail market expectations of a June rate cut. The annual Core rate which excludes volatile items like food and energy came in at 3.8%, down from January’s 3.9% but surpassed forecasts of 3.7%. The shelter index played a significant role in this, experiencing a 5.7% increase over the past year. On month, the core reading increased by 0.4%, slightly surpassing the forecasted 0.3%, but when we look at the unrounded figure of 0.358%, prices actually rose just a tad higher than anticipated.

Perhaps Fed Chair Jay Powell’s recent remarks aimed at tempering rate cut expectations seem to be gaining traction. While no one is expecting the Federal Reserve to cut rates at their meeting next week on the 20th of March, policymakers will consider the totality of data in order to gauge the viability of rate cuts starting in June.

Still to come this week, Eurozone industrial production, US PPI, Retail sales and University of Michigan Consumer Sentiment.

Kate Mimnagh, Portfolio Economist

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