Markets Weekly podcast – 19 February 2024
US inflation and UK recession
19 February 2024
In this week’s podcast, Julien Lafargue discusses US inflation, UK employment and the latest consumer spending figures. He also explores the potential implications of the UK and Japan entering technical recessions.
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Julien Lafargue: Welcome to a new edition of Barclays’ weekly podcast. My name is Julien Lafargue, Chief Market Strategist, and I will be your host today.
As usual, we’ll go through what happened last week, what it means for investors and what to look for in the week ahead. And last week was a relatively quiet week in terms of the number of macroeconomic datapoints we got, but they were pretty relevant.
Starting with the US, probably the most relevant catalyst of the week was the US CPI data, and the news was somewhat mixed. Inflation at the headline level cooled down, which is good news, came in at 3.1% year over year, but the market was expecting a sub-3% reading. Therefore, we saw a sharp repricing in terms of the probability of a Fed hike in March.
As I speak, the market is only discounting a 10% chance or so that the Fed will cut interest rates in March. Remember, that number was a 100% chance that they would cut back in December, so we’ve seen quite a significant shift there.
On a month-on-month basis, core CPI, which is closer to what the Fed would look at, was 0.4% and, again, that was ahead of the Street expectation at 0.3%. The other piece of data that we got, when it comes to US inflation, was the producer price index, the PPI, which still showed disinflation in January at 0.9% versus 1% up in December, and the core number held flat at 2.6%. Again, no sign that the moderation that we were all expecting in inflation is continuing at the same speed. It looks like, in fact, it may have stalled somewhat.
Now, moving on to the other side of the Atlantic and closer to home in the UK, a few interesting datapoints that were received last week, starting with data round the labour market. So, wage growth slowed, which is welcome news when you’re the Bank of England trying to fight inflation. However, at the same time, unemployment dropped. The consensus was expecting an unemployment rate in the UK of around 4% and came in at 3.8%, which, taken together, reflects a still very tight jobs market.
Not only that, but we also got much-better-than-expected retail sales that rebounded strongly at 3.4% in January, recouping their December drop. Remember, retail sales were down 3.3% back then.
The only good news, if you’re the Bank of England, last week was the fact that inflation came in below expectations. But, taking all these data together, it looks like, just as it was the case with the Fed, the BoE may have a hard time cutting interest rates in the very near future.
Now that being said, we also got two very interesting datapoints both in the UK and in Japan, and that is the fact that in the fourth quarter of last year both economies contracted. Their GDP growth was negative and that followed a negative print in the third quarter, meaning that, in technical terms, both Japan and the UK are now officially in recession. And I think this is a fascinating fact, although it’s very background looking, but it’s fascinating when you realise that Japanese equity markets, for example, are at a 34-year high.
And I think for investors this is a very clear reminder that we should not focus too much on lagging data like GDP figures, but on what’s happening at the economic level versus what’s happening in financial markets, and the equity markets in particular.
Last but not least, we got some good news finally from China. China was celebrating the lunar new year over the last week and the travel statistics were actually pretty solid. Travel volume rose 19% above pre-pandemic levels and travel spend rose by 7.7%. So, while it does feel all doom and gloom when it comes to Chinese economic activity, that might be the first indication that there are some signs of life.
Now, what does all this mean for investors? Well, clearly, the hotter-than-expected US CPI pushed rates higher, which weighed on equity markets in the US at least, but clearly even if you think about the price action from last week, sentiment remains quite positive and constructive among investors. And we continue to believe that some form of consolidation is necessary. Not so much because valuations are ridiculous but because we think that this consolidation will at least help us ensure that earnings delivery remains on track.
Meanwhile, for fixed income investors this latest move higher in rates offers another opportunity to lock in yield and potentially extend duration. Just as a reminder, the yield on the Fed-sensitive, let’s say, 2-year Treasury bond has moved from 4.2% just a month ago to 4.6%, so a nice pick up there that investors could try and capitalise on.
Now, in terms of what to look for next week, well, we’re going to have the FOMC minutes on Wednesday. This is important because we may get a sense as to what the Fed intends to do with its balance sheet. There’s been a lot of talk around the slowing down of quantitative tightening and we may get a first indication as to how the Fed intends to proceed.
We will also get a first indication as to the how the global economy is performing in February, with the flash PMIs that come out on Thursday. And in the UK, we get some consumer confidence data on Friday.
But probably the most important catalyst of the week will be the Nvidia results that will come out on Wednesday. Of course, this has been a stellar performer for the US market of late and has done a lot of the heavy lifting when it comes to the index. So, it will be key to see if the company is indeed delivering on the very high expectation that the market has when it comes to its earnings growth.
Now, we will be back next week to debrief all that with maybe a slight surprise for you listeners. But, in the meantime, as always, we wish you the very best in the trading week ahead.
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