16th January 2024
Volatile US inflation data means unlikely rate drop
This week marks 15 years since the renowned ‘Miracle on the Hudson’, in which pilot Chesley ‘Sully’ Sullenberger safely performed an emergency landing in the Hudson River on US Airways Flight 1549. A decade and half later, investors are hoping for another gentle landing – but this time, eyes turn to central banks to guide them.
In keeping with this, some had hoped – or expected – that US interest rates would start to decline as early as March. However, the US inflation data for December, released last week, indicated that things are still complicated. In December, headline inflation rose from 3.1% in November to 3.4%, while core inflation, which excludes the volatile food and fuel sectors, decreased from 4.0% to 3.9% in the same period.
TwentyFour Asset Management partner Felipe Villarroel said the data didn’t indicate any alarming patterns that would prevent inflation from finally returning to the desired 2% rate. But he also said:
“From a macro point of view, it is not surprising to see monthly inflation numbers being volatile. The downward path in inflation is likely to continue to be bumpy and the ‘last mile’ might prove more stubborn than declines seen in previous quarters.”
He therefore predicted that a US interest rate drop in March is unlikely to occur. The US interest rate-setting Federal Open Market Committee will convene again at the end of January. Market players are probably going to be keeping a careful eye out for any indication of the direction they want to take in 2024.
International shipping concerns and tech company success
Geopolitical concerns keep making things more complicated. In Yemen, hostilities between the West and the Houthis are getting worse. The US and the UK have retaliated with missile attacks of their own in the Red Sea, where the Houthis have been shooting at international shipping. Because the Red Sea is crucial to global shipping routes, the increased unpredictability is already affecting fuel prices.
US stocks increased in spite of these concerns. Specifically, the familiar technology companies had a successful week. Notably, Microsoft surpassed Apple last week to grab the top spot as the most valuable company in the world. Both businesses had weekly market values of more than $2.88 trillion; however, Microsoft overtook its long-standing competitor following a 1% gain on Friday.
Predictions of a eurozone rate cut in March cool
In the eurozone, things are still unclear. Governments and central banks have been battling both inflation and a number of slow-moving economies. Following a brief dip two weeks prior, European markets resumed their rather feeble expansion last week. The unemployment rate in the eurozone was found to be 6.4% in December, the lowest since the single currency’s inception.
Chief Investment Officer of BlueBay, Mark Dowding, explained what this implies for the currency block:
“A tight labour market highlights ongoing risks to wage inflation and, in this context, [European Central Bank (ECB) Board member] Isabel Schnabel made comments suggesting that the ECB only sees a modest decline in wages as likely in 2024.
“These comments were taken in a relatively hawkish light in comparison to her comments prior to Christmas, which had been quick to emphasise the progress in bringing inflation down during the fourth quarter last year. Consequently, enthusiasm for a rate cut in March has cooled.”
To somewhat highlight the contradictory worries, German statistics released yesterday morning showed that the largest economy on the continent shrank by 0.3% in the last quarter of 2023 and shrank by the same amount over the course of the whole year.
Declining equities in the UK and China
Last week’s typically mixed equities performance was also seen in the UK, where the FTSE 100 declined. Chinese equities also fell. The problems with the real estate market there still continue to lower values. However, the mood was probably affected by caution ahead of Taiwan’s General Election and Beijing’s retaliatory sanctions on a number of US defence companies.