Monthly Commentary – February 2024

Central bank pushback

At the end of 2023, almost all asset classes demonstrated strong performance, as multiple interest rate cuts were expected in 2024. Central banks have though pushed back on the number of interest rate cuts that may be seen this year, which led markets to pull back slightly. Expectations that major central banks would cut interest rates in March have reduced.

A flurry of data in January suggested economies continue to be in better shape than expected. US GDP growth data was above expectations and company earnings have continued to remain robust. However, if economies are in better shape, there is a concern that inflation will prove sticky and stay elevated. Indeed, some prints in December showed a slight increase in inflation.

Geopolitical tensions could also have an impact on inflation. The conflict in the Middle East and the re-routing of some ships around the Cape of Good Hope to avoid the Red Sea has increased both travel time and costs. However, the oil price has not increased significantly. In addition, reduced consumer spending and weaker growth in economies such as China have dampened demand.

Markets will continue trying to second guess when central banks will cut interest rates and while data is mixed this is likely to mean further short-term volatility.

UK

The bumpy path to lower inflation

Following larger than expected falls in UK inflation in October and November, there was a slight increase in the December data, registering at 4% year-on-year compared to the previous month's 3.9%. However, expected reductions in household energy bills in April and easing food price increases mean we anticipate a continuing decline in inflation over the year ahead.

The British Retail Consortium's Shop Price Index, which has proved a reliable predictor of inflation, fell from 4.3% in December to 2.9% in January, which is the lowest increase in nearly two years. In addition, the labour market, which has been a pivotal factor in the Bank of England's hawkish stance, is showing signs of cooling. Wage inflation has declined to 6.5% from its peak of 8.5% in the middle of 2023. Base effects suggest that official wage inflation will continue to ease in the months ahead.

UK consumer confidence is increasing and reached a two-year high in January. This has been accompanied by positive signals from other leading indicators of UK economic activity, such as the PMI indices.

US

No recession in sight so far

January saw the S&P 500 index reach record highs and the 'Magnificent Seven' stocks continued to deliver strong performance. Markets still expect a 'soft landing', where growth gradually slows and inflation continues to moderate, but a severe recession is avoided. Employment data continues to show resilience, with jobs being added and unemployment remaining steady. GDP growth was significantly higher than expected, with a 3.3% annualised increase in the final quarter of 2023.

The Federal Reserve moved to manage expectations towards the end of the month, suggesting that the number of rate cuts expected by the market was high and a rate cut in March was unlikely.

Europe

Rates on hold

The European Central Bank kept interest rates on hold at its January meeting, maintaining its data-dependent stance. ECB President Christine Lagarde suggested that the first cuts are likely to be in the summer. Although manufacturing PMI data was at a 10-month high of 46.6 in January, it remains in contractionary territory (below 50) and there is now increased concern that weakness in the German economy will start to weigh on broader activity in Europe. We remain cautious about a slowdown in Europe, as growth remains flat and geopolitical uncertainty continues.

Japan

Will money move into Japanese shares?

Signs are growing that negative interest rate policy could be coming to an end in Japan, with some predicting this could be announced in April after the Shunto wage negotiations. Corporate reforms and the introduction of a three-times higher contribution allowance for Japanese ISAs are designed to steer retail investors' money away from the traditional safe haven of cash and into the country's stock market.

Asia and Emerging Markets

Some stimulus but more to come

The MSCI Emerging Markets index ended down 4.6% for the month and the MSCI Asia Pacific ex-Japan index was down 4.8%. China underperformed despite the introduction of economic stimulus measures. These included the central bank cutting its reserve requirements, allowing banks to lend more cash rather than holding it on their balance sheets. There were also reports Beijing is considering a $278bn market stabilisation fund, which would use overseas profits from state-owned-enterprises to purchase Chinese stocks. Elsewhere, there were elections in Taiwan, where a candidate from the ruling Democratic Progressive Party was returned as president. He is likely to continue to forge closer ties with the US and advance Taiwan's semiconductor industry. The International Monetary Fund revised up slightly its projections for growth in emerging market economies this year to 4.1%.

Fixed Income

Great expectations

January began on a rather cautious footing, as the Middle East conflict spread to the Red Sea. This provided an uncertain geopolitical backdrop and bond markets gave back some of their 2023 year-end gains, with yields rising from their recent lows. Despite some hotter-than-expected inflation data, expectations for earlier rate cuts re-emerged as investors became more convinced of the US soft-landing narrative. Central bankers were keen to push back on market pricing around rate cuts and with market data ahead of expectations, investors began to move back their predictions for cuts to later in the year. Yields therefore continued to rise for most of January, before retracing lower towards the end of the month after rate cuts were mentioned at an ECB meeting, raising expectations once more among investors.

1 month performance

3 month performance

12 month performance

Marked Round Up

Source: Morningstar Direct

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