What seems to be really impacting the market mood at the moment is the pushback from central banks on market expectations that rate cuts will be coming as soon as March
At the end of 2023, market pricing was suggesting that the Fed and ECB were almost guaranteed to be cutting rates in March but recent comments from participants have pointed to rate cuts being on the horizon, but maybe not as soon as March. ECB Chief Economist Philip Lane said in an interview at the weekend that “the history of high inflation episodes tells us that if central banks try to normalise too quickly, before the problem is really conquered, then we get another inflation wave, and then another wave of interest rate hikes – that would be a far worse scenario”. ECB President Christine Lagarde told Bloomberg on Wednesday that while a summer rate cut is “likely”, “I have to be reserved because if we are saying we are data dependent, then that there is still a level of uncertainty and some indicators are not anchored at the level where we would like to see them”.
In the US, Fed Governor Christopher Waller dismissed talk of imminent cuts, saying he sees “no reason to move as quickly or cut as rapidly as in the past”. His colleague Raphael Bostic said his “outlook right now is for our first cut to be some time in the third quarter”. That’s a long way beyond March and is reflected in Fed Funds Futures now pricing a 55% probability of a rate cut in March, down from 100% at the start of the year.
There has been a large amount of economic data to digest over the week. Let’s start in China, where the economic data has failed to help the market mood, with Chinese and Hong Kong equities continuing their underperformance of 2023 into the new year. China published its GDP numbers for Q4 which showed growth of 1.0%, below expectations. The growth target for 2023 overall was met, with the economy growing by 5.2%, but the slowing pace of expansion in Q4 highlights a lack of momentum in the economy. Retail sales were behind expectations, up 7.4% year on year while property investment was down 9.6% year on year. There was some more talk of fiscal stimulus this week – clearly something is needed to shift perceptions of China as the country grapples with a property crisis, deflationary pressures, weak confidence and longer term unfavourable demographic trends. China’s population shrank for the first time in over 60 years in 2022, and the trend continued in 2023.
In the US, the Producer Prices Index (PPI) numbers helped boost expectations of rate cuts (though these were later tempered by various Fed speakers). PPI fell 0.1% month on month and was up 1.0% year on year, below expectations. PPI peaked at 11.7% in March 2022 and while the recent data has levelled off, it has not been above 2% since last May. Germany published its GDP numbers for 2023 which showed that the economy shrank by 0.3% overall. However, the country has not yet technically been in recession as it did not see two consecutive quarters of negative growth! The industrial production numbers for the eurozone highlighted the manufacturing weakness across the currency bloc, with a decline of 6.8% year on year. The end of cheap energy is having longer term consequences for the industrial giants of Europe.
It’s been a busy week in the UK for data. The inflation numbers were higher than expected, driven by cigarettes and alcohol (no, not the 1994 Oasis song) per the ONS report. CPI was 4.0% year on year in December, up from 3.9% in November. Core CPI, which excludes energy and food, was unchanged at 5.1%. This figure, despite the increase from November is below Bank of England expectations and the glide path from here still remains lower. Expectations remain that inflation will continue to ease over the coming months, helped by lower energy prices once we get through the forthcoming Ofcom’s 5% increase in the price cap, and other base effects. PPI data is also supportive with input PPI levels down 2.8% year on year and output PPI at 0.1%.
The UK also updated its employment numbers, with payrolls declining by 24,000 in December and the unemployment rate (to November) unchanged at 4.2%. The Bank of England will take some comfort in the slowing pace of wage growth, which was up 6.6% year on year in November compared to 7.2% previously. UK retail sales numbers for December, published this morning, was far weaker than expected, showing a month on month decline of 3.2%. It would appear that the “Black Friday” sales and offers in November brought forward a lot of spending from December.
Political headlines have been dominated, as expected, by the elections in Taiwan and the start of the Presidential election process in the US. In Taiwan, the general election saw victory, as expected for the DPP, led by William Lai Ching-te taking 40.1%. Victory was always likely after a failed attempt by the two main opposition parties to run on a joint ticket that could have given them a combined victory. The DPP win ensures continuity – this will be their third consecutive term in government, albeit with a new leader. Lai has previously been referred to by the Chinese government as a ”separatist” and a “troublemaker” but the post-election rhetoric from both China and Taiwan has been muted, though China did issue a statement reiterating that “Taiwan is part of China”. Given the western reliance on both China and Taiwan, the hope is that the Taiwan/China question remains on the back burner in perpetuity, but we remain alert to any signs of China ramping up the economic or military pressure on Taiwan.
In the US, the Iowa caucus took place, Iowa being the first of the US states to select their candidates for the Presidential election. The result on the Republican side was a dominant win for President Trump, who took over 51% of the 100,000 votes. Voting was well down on previous cycles but that’s no surprise given the snow and minus 20 degrees temperatures. Trump’s win was no surprise, but this was as much about the momentum of the other candidates as it was Trump’s margin of victory. Florida Governor Ron de Santis was a distant second, closely followed by ex-South Carolina Governor Nikki Haley and Vivek Ramasamy further back, so much so that he suspended his campaign and backed Trump. Haley appears to have more momentum going into the New Hampshire primary next week, and this could soon be a two-horse race. In reality though, Trump is so far ahead, this already looks like a done deal.
Have a good weekend,
Regards,
Anthony.
