Market Commentary 6th February 2024 – from Charlie Hancock

The Bank of England (BoE) voted to keep interest rates on hold last week at 5.25%, although the monetary policy committee members were divided, with two members voting for a further hike. The central bank’s governor, Andrew Bailey, stated that the BoE “needs to see more evidence that inflation is set to fall all the way to the 2% target, and stay there, before we can lower interest rates”.

Sentiment in the housing market appeared to experience a small improvement during December, amidst a decline in mortgage rates. The BoE reported that mortgage approvals rose to a 6 month high, although they remain significantly below the pre covid average. Meanwhile, the mortgage lender Nationwide reported that the average house price rose by 0.7% in January.

Official data showed that the Eurozone economy narrowly avoided a recession in the final quarter of 2023, with Gross Domestic Product (GDP) flat for the period. Germany’s economy contracted during the quarter, whilst Spain and Italy experienced growth. Data regarding inflation in the Eurozone showed that the headline rate of consumer price increases slowed to 2.8% in January from the 2.9% recorded for December.

The softening in inflation, combined with weak economic growth, suggests that the European Central Bank (ECB) will have adequate reason to cut interest rates in the coming months. Policymakers at the central bank currently appear divided on when the first cut is likely to be implemented. In recent weeks, some ECB officials have suggested they will wait for the first quarter’s wage growth data to be released before considering whether any interest rate cuts are appropriate.

Investors paid close attention to comments from the Federal Reserve chair, Jerome Powell, following the central bank’s policy meeting last week. The Fed’s voting committee kept interest rates on hold, with Powell stating that an interest rate cut in March is not the Fed’s “base case”. Powell stated that he would need greater confidence in inflation being “sustainably lower” before supporting a rate cut.

The week’s economic data also resulted in financial markets pricing in a lower chance of the central bank cutting rates in March, with markets now pricing in just a 20% chance that the Fed lowers interest rates next month. Data pointing to a resilient labour market supported calls for the Fed to keep rates on hold, with Friday’s jobs report showing that the US economy added 353,000 jobs in January. The number of jobs added was significantly higher than expected, whilst annual wage growth also came in above estimates.

The Chinese property giant, Evergrande, was ordered to enter liquidation last week by a court in Hong Kong, although doubts remain as to whether authorities in mainland China will support the liquidation order. Economic data in China was relatively gloomy, with factory activity shrinking in January. The previous week’s proposals for a liquidity package to support the stock market failed to spur confidence amongst investors, with Chinese equities selling off sharply.

Data in Japan showed that economic momentum faded slightly in January, with the manufacturing sector shrinking, however, price pressures appeared to worsen. Rising costs for materials, labour and energy prompted calls for the Bank of Japan (BoJ) to review their monetary policy stance. The BoJ appeared to be open to the idea of interest rate hikes following their January policy meeting, however, it is widely reported that the central bank are analysing the economic impact of the recent earthquake and they are unlikely to make any monetary policy changes until that assessment is complete.

The BoE poured cold water on calls for an interest rate cut in March, however, investor demand for government debt was strong last week, which helped to push yields lower.

The comments from ECB officials last week suggested that the central bank will not cut rates before April, however, with inflation subsiding and economic growth stalling, it is likely that the ECB will have adequate reason to cut rates before the summer.

During a television interview, which aired on Sunday, Jerome Powell stated that more small banks will likely close or merge, due to weakness in commercial real estate, but that he views the problem as “manageable”. Powell added that he doesn’t think there is much risk of a repeat of 2008.

GBP / EUR – Current 1.1709 Previous 1.1703

The Pound declined by 0.57% against the US Dollar last week. The greenback strengthened as incoming data pointed to the US economy continuing to grow at a faster pace than the rest of the developed world. Against the Euro, the Pound was broadly flat (+0.05%).