Markets Continue To Edge Up

Week Ending, 26th January, 2024

Highlights this week:

US: As it stands, the US economy can’t seem to put a foot wrong! The term “Goldilocks” is being used quite commonly i.e. growth with low inflation and low rates without a recession. The Q4 GDP (Growth) print was good. It registered 3.3% y/y (vs Q3: 4.9%). It was well above consensus. There were strong contributions from all areas – especially inventories (+0.7%) while private consumption is rising at 2.8% y/y. Investment (as represented by CAPEX) is rising at 1.9% y/y. So, overall, quite broad-based.

Furthermore, the US inflation number on the surface looks good too. December headline PCE (Personal Consumption Expenditure, the Fed’s favourite as it is the best indicator of services inflation and its impact on consumers) price index rose +0.17% m/m (Nov: -0.07% m/m) to 2.60% y/y (Nov: 2.64% y/y). The core PCE inflation (ex. Energy and food) also rose +0.17% m/m (Nov: +0.06%) to 2.93% y/y (Nov: 3.15% y/y). However, dig deeper and when you remove the housing component, the main super-core drivers of inflation were financial services & insurance (+0.55% m/m) and nonprofits (+0.58% m/m). Meanwhile, there’s no stopping consumers as they dig into their savings (latest savings rate fell to 3.7%). Cash piles are dwindling in the expectation rate cuts ahead will drive markets even higher and lift their overall net wealth in what remains a very strong job market.

Japan: While manufacturing remains in the doldrums, service activity continued to expand, and exports are picking up. The Bank of Japan kept rates on hold as it eyes headline inflation. Specifically, Tokyo core (ex. Fresh food) inflation fell to 1.6% y/y (Dec: 2.1% y/y) and was much weaker than the expected 1.9%. The core-core (ex. Fresh food and energy) fell to 3.1% (Dec: 3.5% y/y). However, as has been the case for a while, the drop was due to a decline in utility prices helped by government subsidies rolled out last year to ease inflation pressure on households. At some point, these subsidies will be reversed. Meanwhile, corporate (B2B) inflation reached 2.4% y/y matching the previous month’s nine-year high. The latter is the main reason why the BoJ views rising service prices will start to become more prominent. Service price inflation is more closely watched by the BoJ as an indicator of whether wages and inflation are beginning to rise in tandem – the latter is a key test in deciding whether or not to phase out monetary stimulus.

In summary, there’s a lot of conjecture when rate cuts will start but no conviction amongst Central Bankers to start the process just yet. During the week, ECB Head Lagarde was quizzed about an ECB staff poll that said she was doing a poor job! In the UK, recent disruptions in the Red Sea shipping lanes by Houthis is starting to feed through into higher business costs.

For now, markets continue to edge up……enjoy the ride.

Market Summary