Week ending 15th March 2024.

As you can see from the accompanying table, it was a mixed week for markets as investors digested upside to inflation and signs of weakening consumer spending.

Investors shrugged off the hotter than expected US CPI report earlier in the week. However, the subsequent unexpected rise in Producer Price Index seemed to evoke greater concerns about when the Federal Reserve will look to cut interest rates this year. Producer prices rose by 0.6% on month in February greater than 0.3% estimated marking the largest increase since August last year.

The data supports the Fed’s stance of maintaining rates within the 5.25-5.5% range, however February’s retail sales indicate fading spending momentum, particularly in the services sector. Retail sales rose by 0.6% month-over-month in February 2024, following a revised 1.1% drop in January and below market forecasts of a 0.8%. This aligns with the expectation of slower consumption growth ahead despite narratives of economic reacceleration fuelled by recent inflation and jobs data. With a focus on price stability and maximum employment, the Fed is expected to keep rates unchanged at the upcoming meeting. The focus for markets will be on the central bank’s new dot plot which displays the interest rate projections of individual Federal Open Market Committee members, giving valuable insight into the direction of monetary policy.

In Japan, workers union groups reported the highest average wage rises in the last 30 years averaging 5.28%. The report spurred market bets that the Bank of Japan (BoJ) will pull interest rates out of negative territory for the first time since 2007 next week. The central bank has long pursued a goal of achieving sustainable 2% inflation, driven and supported by wage growth. However, the market may be setting itself up for disappointment as cash wage growth remains negative, and inflation has been driven higher by exogenous pressures, remaining relatively low compared to other major economies. Japan’s ultra loose policy has weighed on the Yen, however removing stimulus harbours the risk of deflation rearing its ugly head, policymakers need to be confident that wage growth and inflation is stable.

It was a positive week for China, the Hang Seng closing the week up 2.25%. The People’s Bank of China injected more money into the banking system through its medium-term lending facility, maintaining the lending rate at 2.5%. The state Council also announced plans to boost spending by at least 25% by 2027 to stimulate consumer and business investment, focusing on sectors like industry, agriculture, transport, education, and health care, aligning with Beijing’s goal to achieve 5% economic growth in 2024.

UK and European stocks managed to close the week higher ahead of inflation data and central bank interest rate decisions next week. The Bank of Japan will meet on Tuesday. The Federal Reserve is expected to maintain rates at the 5.25-5.5% range on Wednesday. The Bank of England is expected follow suit on Thursday holding rates at 5.25%.

Data wise next week, China’s industrial production, retail sales and unemployment rate, UK inflation data and retail sales as well as inflation data for Europe and Japan.

Kate Mimnagh, Portfolio Economist