Market Commentary 18th March 2024 – from Charlie Hancock

UK economic data painted a mixed picture. The Office for National Statistics (ONS) stated that Gross Domestic Product (GDP) grew by 0.2% in January, lifting hopes that the UK economy may exit recession during the first quarter of 2023. A bounce back in construction and increased activity in the services sector helped to drive growth during the month. Meanwhile, other data showed the number of companies filing for insolvency rose by 17% year-on-year in February.

The Bank of England governor, Andrew Bailey, stated at a conference that the UK was close to or at full employment, but added that he is not particularly concerned about the prospect of wage increases driving inflation higher. His comments came as data showed the UK unemployment rate rose to 3.9% in the three months to January 2024, whilst wages increased by 6.1%.

France’s CAC 40 index was lifted by gains in luxury goods giants, LVMH and Kerring, with both seeing their share price rise by 2.10% across the week. It was a busy week for European corporate earnings reports, with utility company E.ON seeing their share price rise by 5.92% after raising their profit guidance for 2024. On a less positive note, Volkswagen Group saw their share price decline by 2.33% after announcing that they expect sales growth to slow markedly in 2024.

Data showed that Eurozone industrial production declined by 3.2% in January, suggesting that the bloc’s economy had a sluggish start to the year. On a year-on-year basis, industrial production was 6.7% lower.

Investors paid close attention to US inflation data, which showed that consumer prices rose by 3.2% year-on-year in February. The data was in line with expectations, but fuelled concerns around inflation re-accelerating, given January’s Consumer Price Index (CPI) rise was 3.1%. Meanwhile, retail sales data for February came in weaker than expected, whilst a closely watched survey showed that consumer sentiment declined in March.

A hotter than expected print for the Producer Price Index (PPI), which measures output costs from manufacturers of goods and services, prompted some speculation that the Federal Reserve will be reluctant to cut interest rates in the near future. Inflation as measured by the PPI rose by 0.6% month-on-month in February, which was a significantly bigger than expected increase.

Economic data in China showed that the recovery remains fragile, with demand for borrowing particularly weak. Bank loans expanded at the slowest pace since records began in February, suggesting that consumers are reluctant to take on any new credit arrangements. Fresh data showed that Chinese equities saw inflows for the first time in 7 months, suggesting that sentiment on China’s stock market improved during the month.

Japanese equities had a difficult week after investors reacted to headlines which support calls for the Bank of Japan (BoJ) to hike interest rates in the coming months. A union representing 7 million employees at some of Japan’s largest companies announced that they had negotiated wage increases of 5.3% for 2024, marking the biggest increase since 1991. The announcement fuelled expectations for the BoJ to tighten policy in the near future.

The week’s GDP data may have contributed to Gilt yields moving higher on the basis that the UK may avoid a prolonged recession.

The week’s Eurozone economic data, which was relatively gloomy, appeared to have little impact on yields. In addition, several key European Central Bank (ECB) officials made dovish remarks during the week by suggesting that interest rates could be cut at their June policy meeting.

GBP / EUR – Current 1.1697 Previous 1.1753

The Pound declined by 0.95% against the Dollar and 0.48% against the Euro last week. Data showing the UK economy experienced a rebound in January appeared to have little impact on sentiment in foreign exchange markets, with the Pound selling off against other major currencies.