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Markets last week
Summary
A relatively quiet week for markets following a period of heightened volatility, with most indices modestly positive off the back of multi-week declines
On Monday, the US Census Bureau reported that retail sales in February rose 0.2% compared to consensus expectations of 0.7%. In addition, January’s initially reported sales figure showing a 0.9% decline was revised downward to -1.2%
US existing home sales in February increased by 4.2%, driven by higher supply. Housing starts also surprised to the upside, up 11.2% from January (a 2.9% decline year on year)
Central banks around the world remained mostly in ‘wait-and-see’ mode, with most highlighting the risks associated with global trade tensions for inflationary pressure
Policymakers in the US, UK and Japan all kept rates on hold in meetings this week
Chinese markets fell despite minimal material news, suggesting some profit-taking following significant strength in recent weeks
Gold continued its strong run, up 1.3% this week to bring the year-to-date rally to +15.9%. Oil also recovered, with Brent up 2.2%.
Market Review
The Federal Reserve: Policy uncertainty makes economic outlook uncertain
The Federal Reserve (Fed) held its policy rate steady at 4.25% - 4.5% on Wednesday, indicating that they expect 50bps of rate cuts this year. This is consistent with their previous projection in December, but expectations for economic growth were weaker and inflation projections higher.
The Fed’s post-meeting statement articulated what we have all been thinking in recent weeks. Inflation expectations higher, Gross Domestic Product (GDP) growth lower and a more volatile and uncertain environment. Fed Chair, Jerome Powell, fell short of specific political observations but stated that the Fed’s base case is that the impact of tariffs will be transitory, with a short-term ‘one-off’ effect on price growth.
He suggested that with policy changes to trade, immigration, fiscal policy and regulation on the cards, he and his colleagues are ‘not in a hurry’ to cut rates. Despite this, the tone struck was more dovish than market participants expected, leading to a favourable reaction from indices on the day. A 0.5% increase for US equities this week broke a string of four consecutive weekly declines, giving investors space to take stock. US treasuries also rallied after the meeting, with yields across most maturities falling.
Other economic measures painted a mixed outlook this week for the US economy. Housing market strength is encouraging in the context of risks around the possible impact of higher inflation (and corresponding interest rate) expectations. Data on new home sales released this week will fill out the picture. Retail sales weakness is an area of concern, and we continue to monitor the impact of spending cuts driven by the Department of Government Efficiency (‘DOGE’). DOGE targets include government, health and education workers, which represent a significant portion of US payrolls.
The Bank of England held rates at 4.5% as expected, with only one of the nine Monetary Policy Committee members voting for a cut. The committee expressed concerns over higher inflation expectations, suggesting a slightly more hawkish tone than anticipated. The Bank of Japan kept its short-term policy rate on hold at 0.5% as expected, with little change to its economic outlook. Governor Kazuo Ueda noted concerns around trade tension as a risk to the outlook. The core consumer price index (CPI) rose 3.0% in February, slightly ahead of consensus expectations of 2.9% but below January’s year-on-year level of 3.2%. Brazil’s Central Bank increased rates by 100bps to 14.25%, to reach the highest level since October 2016 with policymakers indicating further potential hikes. US trade and monetary policy were highlighted as sources of uncertainty.
European Central Bank President Christine Lagarde highlighted the challenges arising from uncertainties surrounding rising trade tensions to the European Parliament. She said that the proposed US tariff of 25% on European imports would reduce eurozone economic growth by 0.3%, increasing to around 0.5% if there were retaliatory measures. She also suggested that inflation could rise by 0.5% in such a scenario. These numbers are consistent with estimates of the impact of tariffs during the US-China trade war in 2018 – 2020. Oxford Economics estimated that US GDP fell by 0.2-0.4% and prices increased 0.1-0.3%, whilst failing to shrink the US trade deficit in any meaningful way. Despite concerns around the economic impact of tariffs, European stocks remained steady. The European index remains ahead of the US index by >15% in relative terms year-to-date.
The week ahead
Monday: Flash Purchasing Managers Indices (PMI) for Germany, UK, France and the eurozone
Our thoughts: Composite PMIs will likely give us the first sense of the business sentiment response to US tariffs, which came into effect on 12 March. We expect to see some weakness, particularly in Manufacturing PMIs, but note that this could extend to April’s read too.
Tuesday: US consumer confidence and new home sales
Our thoughts: Consumer confidence is expected to continue its downward trend. Consensus estimates are for a reading of 94.2, down from 98.3 in February, 105.3 in January and 109.5 in December. New home sales are expected to rebound slightly, with consensus pointing to 679K units after the surprise drop to 657K in January.
Wednesday: US GDP and Jobless Claims; UK CPI
Our thoughts: Consensus estimates call for a slight upward revision in US GDP growth, from 2.3% to 2.4%. Jobless claims expected to remain relatively stable. Annual UK CPI consensus expectations are for 2.9% in February, compared to 3.0% in January.
Friday: Japanese CPI; UK Retail Sales, Q4 GDP
Our thoughts: Japanese CPI expected to be relatively flat, with consensus calling for 2.2% core reading, the same as that seen in February. UK retail sales expected to be flat month on month in February after a 1.7% increase in January. UK GDP growth for Q4 is not expected to be revised.
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