Market Commentary 25th March 2024 from Will Binks

Last week saw the release of inflation data for February, which showed that the headline consumer price index (CPI) slowed more than expected, down to 3.4%, from 4.0% in January. Inflation is now at its lowest level since 2021 and this has increased expectations for a cut in interest rates. The Office for National Statistics (ONS) also released retail sales data, which remained unchanged for February and bolsters hopes that the UK economy will recover from its technical recession.

The Bank of England (BoE) voted to keep interest rates on hold last week at 5.25%, although there were dovish messages and one central bank member voted for an interest rate cut of 0.25%. Andrew Bailey, the governor of the BoE, remained optimistic about the UK economy and signalled that interest rate cuts were “in play”.

Investors paid close attention to comments from the European Central Bank (ECB) President, Christine Lagarde, following the central bank’s policy meeting last week. The ECB voted to keep interest rates on hold, with Lagarde keeping investors guessing for the future, stating “even after the first rate cut, we cannot pre-commit to a particular rate path”.

Official data released showed a further softening in inflation within the Eurozone. The headline CPI was confirmed at 2.6% year-on-year in February, the lowest rate in three months as energy, food and alcohol price rises all saw a slowdown from the previous month. The Eurozone also saw wage growth slow, with the slowest rise in over 12 months. Germany saw the sharpest decline in wage growth over the past month in comparison to other member states.

The major US equity indices reacted positively after the Federal Reserve Open Market Committee voted unanimously to leave interest rates unchanged, but sharply raised its forecast for US Gross Domestic Product (GDP) to 2.1%.

The Federal Reserve chair, Jerome Powell, remains bullish on the US economy and told reporters they are still looking at interest rate cuts for 2024. The Fed have not committed as to how far they will cut interest rates, nor when they will begin.

Japan’s Nikkei 225 saw a strong gain following the Bank of Japan (BoJ) meeting last week. The headline interest rate in the nation has left negative territory for the first time in eight years and is now at 0%, from -0.1%. This marks the first time that Japan has raised its interest rate since 2007. Minutes from their meeting also show that the BoJ will gradually phase out corporate bond buying over the next year.

The Chinese property giant, Evergrande, reportedly fabricated $78 billion in revenue, escalating the legal trouble with the company founder, Hui Ka Yan, as he is now in the middle of one of the biggest financial fraud cases in history.  This will limit the company’s ability to repay its $322 billion in liabilities, despite the liquidation order by a Hong Kong court in January. In a similar vein, China’s property-debt crisis generally has worsened, with at least 23 Chinese builders having now received wind-up orders since 2021.

The BoE’s comments last week triggered a movement into 10-Year Gilts, as investors look to lock in a higher interest rate ahead of the expected interest rate cuts.

Christine Lagarde indicated that interest rate cuts are likely this year, but kept it vague. This, alongside dovish messages from other central banks, led to the German Bund yield dipping last week.

The Federal Reserve meeting last week showed several key members, including the Chair, Jerome Powell, all have dovish views on interest rates and a bullish outlook for the economy generally, prompting investors to move into the interest-bearing asset.

GBP / EUR – Current 1.1657 Previous 1.1697

The Pound declined by 1.06% against the Dollar and 0.34% against the Euro last week. Data on UK spending showed a slowdown last week and the Pound fell generally against global currencies.