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Ok. Got itThe European Central Bank (ECB) held interest rates steady in January, with an emphasis on data dependence and an acknowledgement of weak economic growth in the region.
The last mile
Markets started the year on less solid grounding. Resilient economic data, notably from the US, fuelled optimism for a possible “soft landing”. While this buoyed some sections of the markets, it also played into guarded central bank commentary, which saw markets retrace some of the year-end rally. Geopolitical undercurrents also remain prominent with a record election year ahead.
Drone attacks on Russian energy infrastructure and escalating tensions in the Middle East saw the oil price increase by 6,1% over the month. With attacks in the Red Sea also still prevalent, markets continue to monitor the broadening of tensions in the Middle East as well as disruptions to shipping in the Suez Canal for its effect on supply chains. The impact from disruptions on input prices are already being noted in surveys, although the magnitude is not comparable to the disruption seen during the pandemic.
China printed economic growth of 5,2% in the fourth quarter, bringing the full year figure for 2023 to 5,2%. While the figures were light relative to market expectations, it still met the country’s annual economic growth target of an average 5,0%. Chinese policy makers accelerated stimulus efforts in January, with a 50bps cut in the reserve ratio requirement. With a subdued economic growth backdrop, Chinese inflation figures remained in deflationary territory, although headline CPI printing higher at -0,3% y-o-y for December.
Idiosyncratic factors such as an increase in tobacco duties in the UK and a withdrawal of energy subsidies in Europe lifted inflation prints, with Eurozone headline inflation for December accelerating to 2,9% y-o-y from 2,4% the previous month. Similarly, inflation in the UK increased to 4,0% y-o-y from 3,9% in November. US headline inflation accelerated to 3,4% y-o-y in December, while core inflation moderated to 3,9%. While only marginally ahead of expectations, the data release still served as a handbrake on market pricing. Producer prices printed at 1,0% from 0,9% the prior month. Data for the US personal consumption expenditure price index (PCE) was recorded at 2,6% (an increase over the month but steady y-o-y figure), with the annual rate for core PCE (the Fed’s preferred measure of inflation) slowing to 2,9%. Q4 GDP for the US exceeded expectations, printing at 3,3% in the fourth quarter as consumers remained resilient. Economic releases over the month also pointed to a robust start to the year.
In line with expectations, the US Federal Reserve (US Fed) kept interest rates on hold once again at the end of January, at a multi-decade high. While striking a dovish tone, however, the commentary from the US Fed still cooled market expectations for a March interest rate cut. The European Central Bank (ECB) held interest rates steady in January, with an emphasis on data dependence and an acknowledgement of weak economic growth in the region. The Bank of Japan (BoJ) remained on hold, keeping markets waiting for a much-anticipated interest rate hike as it starts tightening monetary policy after a prolonged period of low interest rates.
While the yearend rally continued for the S&P 500 and in particular for technology stocks making up the “Magnificent Seven”, other markets weakened against a backdrop of high expectations and market pricing. Concerns around the sustainability of the Chinese property sector escalated once again after a Hong Kong court ruled that embattled real estate developer, Evergrande, should be liquidated given a lengthy but ultimately unsuccessful restructuring effort. With more than $300bn in liabilities, the outcome will be watched closely given the prevalence of international investors. Chinese equity markets ended the month down 9,3% which dragged emerging markets weaker, with the MSCI Emerging Markets index returning -4,6%.
With markets reigning in the timeline for interest rate cuts, the US dollar gained (1,9%) on a trade weighted basis, while the Bloomberg Global Aggregate Bond index moderated 1,4% in January. US 10-year bond yield moved back above the 4,0% mark during the month but trended down to 3,9% again by month end. The last mile for inflation, and perhaps interest rate cuts, may indeed be the hardest.
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