19th February 2024
Markets last week
Economic data drove market performance last week, causing nauseating fluctuations. Most regions’ equity markets finished in positive territory. The US equity market finished in the red
US Treasury yields surged on Tuesday due to a robust inflation report, leading to a downturn in US stock prices and increased market volatility
Retail sales data towards the end of the week stabilised the market, highlighting the need for caution in interpreting economic data
Despite a partial reversal in Treasury yields due to soft retail sales and dovish comments from the US Federal Reserve (Fed), inflation concerns persisted, further lowering expectations for Fed rate cuts
UK equities had a positive week, driven by consistent data indicating a slowing UK economy, easing inflation, and the possibility of future rate cuts by the Bank of England (BoE)
The UK entered a technical recession, with two consecutive quarters of negative GDP growth
UK services inflation ticked higher, highlighting it as a remaining concern for the BoE
Next week is a quiet week regarding economic data releases. Though the minutes are due to be released from the previous Fed and European Central Bank (ECB) meetings, neither are likely to move markets.
Analysis
Economic data was the driver of market performance last week. Unfortunately deciphering the economic data from the past week induces a similar nausea to a merry-go-round, with the equity market experiencing a mild case of whiplash. The week began quietly, but on Tuesday, US Treasury yields surged, led by the shorter-dated part of the curve, following the unexpectedly robust US Consumer Price Index (CPI) report. This surge was the largest daily increase in front-end yields (known as ‘bear-flattening’) since the volatility surrounding the banking turmoil last March.
Headline and core CPI for January came in slightly hotter than economists had anticipated, which triggered a downturn in US stock prices, a noticeable increase in Treasury yields and a spike in implied volatility (a measure of fear in financial markets). The narrative shifted towards the end of the week as retail sales data indicated subdued economic activity, stabilising the market. Caution is warranted when interpreting incoming economic data, given the inherent noise, but the market in recent months has significantly reacted to relatively mild economic surprises.
Headline and core inflation came in at 0.3% and 0.4% month-on-month respectively vs economists’ expectations of 0.2% and 0.3%. While the headline inflation figure, subdued by falling gasoline prices, continued its downward trajectory from the previous year, slipping to 3.1% from 3.4% in December, the core index rose by 3.9%, the same as a year ago. Although this represents an interruption to the disinflationary trend and was a reality check for markets, inflation is now significantly below the peak of the cycle in September 2022, and from our perspective, the final progress required to bring inflation back to the Fed’s 2% target was always going to be more difficult and volatile.
The sell-off in Treasury yields was partially reversed due to soft retail sales and dovish comments from Fed officials later in the week; however, the lingering inflation concerns persisted, driving expectations for Fed rate cuts lower. The rise in yields was not isolated but part of a broader trend this year, with the curve bear-flattening in response to diminishing expectations for Fed rate cuts. The market-implied probability of a rate cut in March has fallen from 85% early in the year to close to 10% currently.
Across the Atlantic, UK equities had a better week, with the FTSE All-Share rising 1.7%. Economic data was more consistent in conveying a slowing UK economy – counterintuitively, a positive for equities, as inflation continues to be the most prominent concern and the subsequent implications for monetary policy. Inflation cooled more than expected and UK GDP growth in the fourth quarter came in at -0.3%. As economic growth in the third quarter was also negative, this means that the UK has now entered a technical recession, with two consecutive quarters of negative growth. This data makes it easier for the BoE to cut rates later in the year, which would benefit the UK’s stock market, all else being equal.
Despite softening inflation, investors have been broadly surprised in recent months of the resilience of UK industry. Manufacturing and industrial production has surprised to the upside and Purchasing Manager’s Indices – a good leading economic indicator – have also been hotter than anticipated: the UK’s services sector in particular has been firing on all cylinders. The most prominent remaining concern for the BoE is now services inflation, which remains too high for the BoE’s comfort – and until further progress is made here, the central bank is unlikely to ease policy.
The Week ahead
Wednesday: Federal Open Market Committee Minutes
Our thoughts: The Fed is expected to cut rates in June; analysts will be looking for any additional insights around the timing of cuts. It’s worth noting that much has changed since the previous Fed meeting. Before the meeting, inflation data had surprised to the downside and economic data had surprised to the upside. Since the meeting, inflation data has surprised to the upside whilst economic data has surprised to the downside. These surprises should be attributed more to noise than signal, but it shows that the Fed has a difficult balancing act of bringing the economy down to a gentle soft landing.
As well as the minutes this week there is plenty of Fed talk, with key officials due to speak and some important economic data, including the Conference Board Leading Economic Index, which combines ten key leading economic indicators.
Thursday: ECB Minutes
Our thoughts: ECB President Christine Lagarde has struck a careful balance in her messaging to markets, ensuring that the ECB has as much optionality on policy this year as possible. The minutes could provide insights into the stances of both dovish and hawkish camps within the ECB Governing Council, shedding light on their main arguments as the next meeting approaches.
Markets for the week
In Local Currency In Sterling
Index | Last Week | YTD | Last Week | YTD |
UK | ||||
FTSE100 | 1.8% | -0.3% | 1.8% | -0.3% |
FTSE250 | 0.7% | -2.5% | 0.7% | -2.5% |
FTSE All-share | 1.7% | -0.6% | 1.7% | -0.6% |
US | ||||
US equities | -0.4% | 4.9% | -0.2% | 6.2% |
Europe | ||||
European Equities | 1.1% | 5.4% | 1.2% | 3.9% |
Asia | ||||
Japanese Equities | 2.6% | 10.9% | 2.2% | 5.3% |
Hong Kong Equities | 3.8% | -4.1% | 3.9% | -3.1% |
Emerging Markets | ||||
Emerging Market Equities | 2.1% | -0.7% | 2.3% | 0.5% |
Government Bond Yields* | Current Level | Last Week | YTD | |
10-year Gilts | 4.11% | 2 | 57 | |
10-year US Treasury | 4.28% | 10 | 40 | |
10-Year German Bund | 2.40% | 2 | 38 | |
*Yield change in basis points | ||||
Currencies | Current level | Last week | YTD | |
Sterling/USD | 1.2602 | -0.2% | -1.0% | |
Sterling/EUR | 1.1692 | -0.2% | 1.4% | |
Euro/USD | 1.0777 | -0.1% | -2.4% | |
Japanese Yen/USD | 150.21 | -0.6% | -6.1% | |
Commodities (in USD) | Current level | Last week | YTD | |
Brent oil (bbl) | 83.47 | 1.6% | 8.3% | |
WTI oil (bbl) | 79.19 | 3.1% | 10.5% | |
Copper (metric tonne) | 8489 | 3.9% | -0.8% | |
Gold (oz) | 2013.59 | -0.5% | -2.4% |
Sources: FTSE, Canaccord Genuity Wealth Management
Your weekly market review was powered by Canaccord Genuity Wealth Management (CGWM)
Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity. Where investment is made in currencies other than the investor’s base currency, the value of those investments, and any income from them, will be affected by movements in exchange rates. This effect may be unfavourable as well as favourable. Past performance and future forecasts figures are not a reliable indicator of future results.
