Market Commentary 19th February 2024 – from Charlie Hancock

The market reaction following the release of UK Gross Domestic Product (GDP) data was muted, with investors seemingly already aware that growth in the UK is sluggish. UK GDP declined by 0.3% in the fourth quarter of 2023, which was a steeper decline than expected by economists. The contraction followed a fall of 0.1% in the third quarter, which means that the UK officially entered a recession (defined by two consecutive quarters of negative growth).

Last week also saw the release of inflation data for January, which showed that the headline consumer price index (CPI) saw a smaller than expected annual increase of 4%. Economists had predicted that inflation would be 4.2%. Data for wage growth came in stronger than expected, which prompted some concerns that pay increases may contribute to further inflationary pressures for the UK economy.

Official data showed that the Eurozone economy saw no change during the fourth quarter of 2023, with GDP growth of 0%. Previous data showed that the Eurozone contracted by 0.1% during the third quarter of 2023 and so the trading bloc only narrowly avoided a recession in the final quarter of the year.

The European Central Bank (ECB)’s chief economist, Philip Lane, warned that mortgage payments are set to increase for a significant amount of borrowers in the Eurozone, stating that there “are going to be a lot more people exposed to interest rate changes”. Approximately 30% of current fixed rate mortgages in the Eurozone will mature this year, although there is significant disparity across the region, given that some member states such as Spain and Italy commonly have shorter term fixes, whereas longer fixed rates are more common in others, such as Germany.

Data released on Tuesday showed that US inflation was higher than expected in January, with consumer prices rising by 3.1% year-on-year. Core inflation remained relatively elevated at 3.9%. US equities sold off following the release of the data, with investors appearing concerned that higher than expected inflation may prompt the Federal Reserve to keep interest rates on hold in the coming months.

Other US economic data pointed to a slowing economy. The construction sector saw weaker than expected activity during January, although harsh winter weather may have contributed to this. Retail sales were much weaker than expected in January ,with a decline of 0.8%. Some analysts pointed to seasonal factors, such as the cold weather, but leisure spending at restaurants and bars was notably strong which called into question the argument that cold weather had a negative impact.

Newsflow regarding China was particularly light due to the New Year holiday celebrations. Early estimates for retail spending during the holiday period indicated that consumers were in a relatively optimistic mood, with increased consumption versus pre covid levels.

Official data from Japan showed that GDP shrank by 0.4% in the fourth quarter of 2023, which was worse than expected and means that the Japanese economy entered recession following a contraction in the third quarter. Investors appeared to shrug off the data, with Japanese equities experiencing a rally, although this was partly driven by the Yen weakening versus the US Dollar, which typically provides a tailwind for export driven companies in the Nikkei 225 index.

Data confirming the UK entered recession during the final quarter of 2023 pushed gilt yields lower, however, debate around when the Bank of England (BoE) are likely to cut interest rates raged on. There is some speculation that the central bank will be reluctant to cut rates in the near future due to stronger than expected wage growth data.

The week’s economic data pointed to continued sluggish growth in the Eurozone, with the economy stagnating in the final quarter of 2023. Debates regarding how soon the European Central Bank (ECB) will cut interest rates continued.

The former president of the St. Louis Federal Reserve, James Bullard, who has historically been relatively hawkish, stated on Friday that he believes the central bank should start cutting interest rates from next month. Bullard suggested that current interest rates could restrict economic activity later in 2024 if they are kept on hold.

GBP / EUR – Current 1.1692 Previous 1.1710

The Pound declined by 0.21% against the US Dollar, with the week’s economic data appearing to have little impact on sentiment amongst currency traders. Against the Eurozone currency, the Pound fell by 0.15%.