Arm and a Leg

Global equities had another positive week, rising slightly over 1.0% in both local currency and sterling terms. China fared best with a gain of 3.3% in sterling terms. But the US also outperformed with a gain of 1.7% and the S&P 500, the main equity benchmark, broke through the symbolic 5000 mark for the first time. UK equities, by contrast, had a disappointing week and were down 0.6%.

Bonds also saw losses of 0.5-1.0% on the back of 10-year government yields rising 0.15% as hopes for rate cuts were scaled back further. In the US, the market now expects rates to be lowered by little more than 1.0% this year, rather than by as much as 1.7% as had been hoped all of a month ago.

This reappraisal comes on the back of comments from Fed Chair Powell suggesting rate cuts are unlikely to start much before the summer and the recent strong economic data. Last week’s news of an unexpectedly large bounce in business confidence in the service sector reinforced the message from the blow-out labour market report of the previous week.

In the UK, rates are now only forecast to be cut by 0.75% this year. Here again, recent economic news has been firmed than expected. Business confidence in January was revised higher and is now comfortably back in expansionary territory, having been flagging a recession last autumn.

The Halifax also reported a surprisingly strong 1.3% rise in house prices in January, echoing the 0.7% gain in the Nationwide index and suggesting the housing market is already benefiting from the recent fall in mortgage rates.

Still, any relief may be short-lived for the Government. This week’s GDP numbers could well show activity contracting slightly in the fourth quarter for the second quarter running, leading no doubt to headlines screaming that the UK has slipped into recession.

A more meaningful but rather less dramatic representation of the state of affairs would be that GDP saw a modest gain of 0.5% or so over 2023 overall and is set to see a similar performance this coming year.

Last week’s gains in US equities were once again led by the tech sector. This time, the good performance was sparked by good results from ARM, the UK chip designer. Its shares ended the week up 60% and helped drive a 9% gain in Nvidia, the US AI-chip producer whose market cap is now up to just under $1.2 trillion.

Overall, partly on the back of strong numbers from most of the Magnificent Seven tech stocks but also the unexpected strength of the economy, corporate earnings in the US are once again beating expectations. With around 65% of companies now reported, the expectation is for S&P 500 earnings to be up a healthy 9.0% on a year earlier.

As for the bounce in Chinese stocks, this came on the back of state-driven purchases. If the market is to build on these gains, rather than just directing state-owned enterprises to prop up the market, the authorities will need to come up with new measures to address the underlying malaise in the economy.

This coming week, attention will return back to inflation. US numbers are reported on Tuesday and are expected to show headline and core inflation edging lower in January to 3.0% and 3.8% respectively. By contrast, the UK figures on Wednesday are likely to see headline inflation ticking higher for the second month running to 4.2%.

Rupert Thompson – Chief Economist