Central Banks signal possible rate cuts in Spring

This week falling inflation and positive updates from central banks helped generate an optimistic mood. Equities have done well so far this year, but bonds have struggled due to the tension between central banks and markets’ assumptions about rate cuts. Investors have been forced to readjust as inflation remained sticky and central banks appeared reluctant to move too early. However, positive inflation updates and signs that jobs markets are cooling, plus signs that apparently insatiable US consumer demand is slowing have caused a big shift in central bank messaging.

Members of the ECB have been noticeably more upbeat about rate cuts, while Bank of England governor Andrew Bailey talked of the need to be forward looking, and said inflation doesn’t need to be back to target before acting. In the US, Jerome Powell was similarly optimistic about progress on inflation and investors and central banks appear to be settling on late spring as the date for the first rate cuts. There is still plenty of scope for disappointment but markets are enjoying the outbreak of positivity as bonds have been able to join the rally.

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• Rates: USA and UK leave rates unchanged for now
• Rates: Japan and Switzerland address different inflation issues
• Retail: Signs that USA consumer demand is starting to cool

(*Please note, The contents of this e-shot been prepared for general information only. It does not contain all of the information which an investor may require in order to make an investment decision. If you are unsure whether this is a suitable investment you should speak to your financial adviser. This information is not guaranteed to be correct, complete, or accurate. FE Research is a division of Financial Express Investments Ltd, registration number 03110696, which is authorised and regulated by the Financial Conduct Authority (FRN 209967). For our full disclaimer please visit www.financialexpress.net/uk/disclaimer. Data Sourced from FE Analytics, and Bloomberg Finance LP.)

UK – GDP rises in January, BUT….

The jobs market in the UK remains robust but there are more signs of a slowdown. Unemployment increased slightly to 3.9% and the number of people who are economically inactive increased again. Wage inflation also continues to slow and recruitment firm Reed reports that job vacancies have fallen to the lowest in three years.

The UK economy returned to growth in January after entering recession in the second half of 2023. Monthly GDP increased by 0.2%, mainly due to a pick-up in services activity. However, growth remains weak. After adjusting for inflation, GDP declined by 0.1% over the three months to end of January. Bank of England governor Andrew Bailey said the UK is close to or at full employment but says the Bank of England does not need to see any deterioration in employment before cutting rates as the risks of wage growth fuelling further bouts of inflation has receded. The data means the outlook for interest rate cuts remains unchanged ahead of next week’s interest rate meeting as sterling fell slightly.

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• US: Government Bonds fall as markets push back their expectations for Fed rate cuts.
• US: Rising inflation and string spending weigh heavily on US Government Bonds
• Tech: Tesla appears out of step with other US Tech giants

(*Please note, The contents of this e-shot been prepared for general information only. It does not contain all of the information which an investor may require in order to make an investment decision. If you are unsure whether this is a suitable investment you should speak to your financial adviser. This information is not guaranteed to be correct, complete, or accurate. FE Research is a division of Financial Express Investments Ltd, registration number 03110696, which is authorised and regulated by the Financial Conduct Authority (FRN 209967). For our full disclaimer please visit www.financialexpress.net/uk/disclaimer. Data Sourced from FE Analytics, and Bloomberg Finance LP.)

Chancellor takes final chance for pre-election giveaway

This week has been all about politics. The US presidential primary season ended as Nikki Haley withdrew from the Republican contest. With no official challenger to Joe Biden among the Democrats, it is now a two horse race between Biden and Donald Trump to the election in November. Meanwhile, China’s biggest annual political event, the National People’s Congress, also concluded this week. The congress brought confirmation that China’s target for annual GDP growth will remain at 5%. However, there were no new policies designed to meet the ambitious growth target.

In the UK, Jeremy Hunt used the budget for a few pre-election sweeteners. Under pressure from backbenchers to come up with a tax cut or two, the chancellor opted for another cut to national insurance. Not only can be it be presented as pro-growth and rewarding work, it is also cheaper than cutting income tax. The government will be relieved that the economic outlook has improved slightly but all in all it was a low key budget. There was nothing to move markets and the government will need more than a small NI cut or 0.1% increase in GDP to turn its fortunes around.

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• UK: Markets steady as Government increases borrowing to fund tax cuts
• Rates: ECB on hold as US Fed remains cool on timing of first cuts
• Equities: Big Tech facing more regulatory headwinds

(*Please note, The contents of this e-shot been prepared for general information only. It does not contain all of the information which an investor may require in order to make an investment decision. If you are unsure whether this is a suitable investment you should speak to your financial adviser. This information is not guaranteed to be correct, complete, or accurate. FE Research is a division of Financial Express Investments Ltd, registration number 03110696, which is authorised and regulated by the Financial Conduct Authority (FRN 209967). For our full disclaimer please visit www.financialexpress.net/uk/disclaimer. Data Sourced from FE Analytics, and Bloomberg Finance LP.)

Inflation in US slows, but some spending unaffected by high rates

This week investors breathed a sigh of relief as US core inflation resumed its downward trend. The Core Personal Consumption Expenditure Price Index is a significant measure of US inflation as it is closely watched by the Federal Reserve. After appearing stubbornly high at the previous two readings, the small move down this month has been welcomed by those concerned that central bank rate cuts were in danger of being delayed. We’ve also seen headline CPI inflation in Europe decline due to disinflation in France and Germany.

However, there are signs that controlling inflation fully may be difficult. US Core PCE is down over one year, but the monthly reading picked up. Meanwhile goods prices are falling but services inflation is still rising strongly on both sides of the Atlantic. In the UK, for example, Halfords is feeling the effect of less spending on goods while IAG is the latest airline to cash-in on the post-Covid travel boom. As pointed out by Bank of England member Catherine Mann, a lot of inflationary spending is coming from wealthy consumers who are not affected by higher borrowing costs.

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• US: Markets reassured as core inflation eases
• UK: Poor earnings updates drag on the wider market
• UK: LSE looks to a brighter future as Shein eyes London IPO

(*Please note, The contents of this e-shot been prepared for general information only. It does not contain all of the information which an investor may require in order to make an investment decision. If you are unsure whether this is a suitable investment you should speak to your financial adviser. This information is not guaranteed to be correct, complete, or accurate. FE Research is a division of Financial Express Investments Ltd, registration number 03110696, which is authorised and regulated by the Financial Conduct Authority (FRN 209967). For our full disclaimer please visit www.financialexpress.net/uk/disclaimer. Data Sourced from FE Analytics, and Bloomberg Finance LP.)