Inflation Surprise Rattles Markets
12 April 2024
Global equity markets tended towards the negative in the latest week. It will surprise absolutely no one that the considered villain in this was inflation. Or to be more accurate, US inflation. Consumer price pressures have not ebbed in the fashion expected and the headline annual inflation rate for March came in at 3.5%, up from 3.2% and higher than consensus estimates. And as the highest reading since last September, there was some deflation in market expectations for when the US Federal Reserve might start to cut rates. The speculation ratcheted up a notch to the extent that there were questions in some corners of the market on whether the Fed might settle for just one rate cut this year. At the start of 2024, markets were pricing in up to six rate cuts before coming back in line with Fed guidance of three cuts. Confidence in the likelihood of three cuts has certainly taken a knock.
While markets were assimilating the US inflation data and the ramifications for US rates, the European Central Bank indicated it was still planning to cut interest rates in June. It kept rates unchanged as expected at its Thursday meeting and stated that would remain the case until inflation had stabilised; it was also revealed that some members favoured a cut and the post-meeting statement contained language that was interpreted as meaning a June cut remains the likely scenario.
One upshot of the diverging rate sentiment on either side of the Atlantic was a stronger US dollar. Indeed, the greenback was reported by the Financial Times as having had its best week since 2022. According to the FT, both the euro and sterling dropped to their lowest levels since last November, while Japan’s yen sank to a new 34-year low.
Market Moves
For equity markets, the weak Japanese currency buoyed the country’s export-oriented stock market – the Nikkei 225 was one of the better performers in the week. Although markets are still expecting the Bank of Japan to tighten again before the end of the year, the central bank ruled out intervening in the currency markets to support the yen. The UK FTSE 100, which also has a substantial international focus, benefited from the US dollar’s strength. Meanwhile, the UK economy is showing encouraging signs of life. Having dipped into recession in Q4, the UK Office of National Statistics reported that GDP expanded by 0.1% in February and revised higher January’s growth from 0.2% to 0.3%.
Elsewhere in Europe, stock market performance was mixed with most indices lower for the week. Again, there were some bright spots in the region including a pick-up in German industrial production, which rose 2.1% in February after an increase of 1.3% in the previous month. Year-over-year, it was down 4.9%. A measure of eurozone investor confidence, compiled by Sentix, increased in April to its highest level in more than two years.
Meanwhile, first quarter earnings season got under way with a number of big US banks reporting. JP Morgan reported a 6% increase in Q1 profits, while Citigroup topped expectations with profits of $3.4 billion. Wells Fargo reported a drop in profits from $5bn to $4.6bn.
It was a mixed week for bond markets. US bonds were weaker on the back of higher inflation, with 10-year Treasury yields up from 4.41% to 4.53%. Similar-dated UK Gilt yields ticked up from 4.07% to 4.14%, but eurozone bond yields generally fell on the firmer ECB messaging about a June rate cut. Ten-year German Bund yields fell from 2.41% to 2.36%, while Irish Gilt yields dipped from 2.84% to 2.79%.
While markets were assimilating the US inflation data and the ramifications for US rates, the European Central Bank indicated it was still planning to cut interest rates in June. It kept rates unchanged as expected at its Thursday meeting and stated that would remain the case until inflation had stabilised; it was also revealed that some members favoured a cut and the post-meeting statement contained language that was interpreted as meaning a June cut remains the likely scenario.
One upshot of the diverging rate sentiment on either side of the Atlantic was a stronger US dollar. Indeed, the greenback was reported by the Financial Times as having had its best week since 2022. According to the FT, both the euro and sterling dropped to their lowest levels since last November, while Japan’s yen sank to a new 34-year low.
Market Moves
For equity markets, the weak Japanese currency buoyed the country’s export-oriented stock market – the Nikkei 225 was one of the better performers in the week. Although markets are still expecting the Bank of Japan to tighten again before the end of the year, the central bank ruled out intervening in the currency markets to support the yen. The UK FTSE 100, which also has a substantial international focus, benefited from the US dollar’s strength. Meanwhile, the UK economy is showing encouraging signs of life. Having dipped into recession in Q4, the UK Office of National Statistics reported that GDP expanded by 0.1% in February and revised higher January’s growth from 0.2% to 0.3%.
Elsewhere in Europe, stock market performance was mixed with most indices lower for the week. Again, there were some bright spots in the region including a pick-up in German industrial production, which rose 2.1% in February after an increase of 1.3% in the previous month. Year-over-year, it was down 4.9%. A measure of eurozone investor confidence, compiled by Sentix, increased in April to its highest level in more than two years.
Meanwhile, first quarter earnings season got under way with a number of big US banks reporting. JP Morgan reported a 6% increase in Q1 profits, while Citigroup topped expectations with profits of $3.4 billion. Wells Fargo reported a drop in profits from $5bn to $4.6bn.
It was a mixed week for bond markets. US bonds were weaker on the back of higher inflation, with 10-year Treasury yields up from 4.41% to 4.53%. Similar-dated UK Gilt yields ticked up from 4.07% to 4.14%, but eurozone bond yields generally fell on the firmer ECB messaging about a June rate cut. Ten-year German Bund yields fell from 2.41% to 2.36%, while Irish Gilt yields dipped from 2.84% to 2.79%.
Source: All information is from Bloomberg Finance LP as of Friday 12 April 2024 unless otherwise noted and has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. This information should not be considered a recommendation to invest in a particular security or to buy or sell any security shown. It is not known whether the securities shown will be profitable in the future.
A Week on the Markets
Source: Bloomberg Finance LP. Capital returns in local currency for the week Friday 12 April 2024.
Past performance is not a reliable indicator of future performance. Index returns are unmanaged and do not reflect the deduction of any fees or expenses.