Market Commentary 11th March 2024 – from Charlie Hancock

The Chancellor, Jeremy Hunt, delivered his Spring Budget on Wednesday. A cut of 2% to the main rate of national insurance was announced, together with changes to the child benefit tax charge thresholds. Hunt also announced a new ‘UK ISA’ which will provide investors with an additional £5,000 allowance to invest in UK equities, with Hunt explaining that he wants to boost investment in UK firms.

A Purchasing Managers’ Index (PMI) for the UK compiled by S&P Global indicated that economic activity in the UK expanded in February. The biggest improvement was in the housebuilding sector. Although construction activity continued to shrink, the pace of contraction was much less severe than in previous months.

Investors paid close attention to the outcome of the European Central Bank (ECB)’s policy meeting last week. The ECB kept key interest rates on hold and signalled that more confidence is needed regarding falling inflation before interest rates will be lowered. The president of the central bank, Christine Lagarde, stated that “we will know a lot more in June”, which is when markets currently expect the ECB will begin cutting interest rates. The central bank also revised their forecasts to show a faster than expected decline in inflation, with the ECB now expecting inflation will return to their 2% target in 2025.

Economic data for Germany continued to point to weak growth, with factory orders in January declining by 11% versus December. Consumer demand appears to be weak, with new orders for consumer goods declining, whilst business investment also declined amidst the uncertain economic outlook.

Investors paid close attention to US labour market data, which painted a mixed picture. Although the number of new employees added to payrolls during February came in higher than expected at 275,000, January’s payroll number of 353,000 was revised sharply lower to 229,000. The data showed that the US unemployment rate rose to 3.9% in February, marking the highest rate since January 2022. Economists had been expecting the rate to remain unchanged from January’s 3.7%.

Concerns around persistent inflationary pressures in the US appeared to ease as a result of data on wage growth, which showed that average hourly earnings rose by just 0.1% in February, down from 0.5% in January.

Authorities in China continued to try and shore up confidence in the nation’s economic outlook, with the government announcing a target for Gross Domestic Product (GDP) growth of 5% in 2024. It was noted that the government did not publish any reports mentioning President Xi’s slogan of “housing is for living in, not speculation”, which has been widely used since 2019. The government appears to be taking a softer approach on regulation in the property sector, with authorities hoping to see sentiment improve.

Economic data in Japan pointed to weak economic growth, with household spending declining at the sharpest pace for almost three years during January. Wages accelerated faster than expected, which prompted rising expectations for the Bank of Japan (BoJ) to change their monetary policy measures in the coming months. The BoJ have repeatedly stated that sustainable wage increases would be a necessary condition for them to consider raising interest rates.

The Chancellor’s budget speech appeared to have little impact on UK bond markets and Gilt yields fell in tandem with government bond yields elsewhere around the globe.

Although the ECB kept interest rates on hold, market expectations for an interest rate cut in June increased following comments from the central bank’s President, Christine Lagarde.

Comments from the Fed chief, Jerome Powell, contributed to Treasury yields moving lower across the week.  Powell stated that the Fed are “not far” from having confidence in the recent inflation downtrend being sustained.

GBP / EUR – Current 1.1753 Previous 1.1675

The Pound gained 1.60% against the US Dollar and 0.67% against the Euro last week. Currency traders appeared bullish on the Pound following better than expected UK economic data.