Global equities rose 1.0% in sterling terms last week and the UK, Europe and China led the way with gains of around 2.5%. Markets took comfort from the latest economic numbers which painted a picture of continued economic resilience.
Notably, US growth continued to run at an unexpectedly firm 3.3% annualised pace in the fourth quarter. This followed a strong 4.9% gain in the previous quarter.
Business confidence in the US, Eurozone and UK also built on the improvement seen in the last few months with a further small rise in January. The Eurozone remained the area of most weakness with confidence in France and Germany bucking the general trend and deteriorating a little.
In the UK, consumer confidence rose for the third month in a row in January to a 2-year high. This was reassuring following the unexpectedly large drop in retail sales seen in December.
The US also saw encouraging news on the inflation front. The Fed’s favoured measure of core consumer prices rose in the fourth quarter at an annualised rate of 2% for the second quarter running, bang in line with the Fed’s inflation target. Compared with a year earlier (the more normal basis of comparison), the latest slowdown in price pressures has yet to fully feed through and core prices were up a rather higher 2.9% in December.
Even so, the latest news gives the Fed the excuse to cut rates sooner rather than later, if it should want to do so. But with growth remaining surprisingly strong, there is little need for an early cut to prop up the economy. Memories of premature easing in the past, which were followed by a resurgence of inflation, may make the Fed wary of lowering rates too early.
The elections in November are an additional complication. The Fed would undoubtedly prefer to keep policy changes to a minimum in the immediate run-up to the election, increasing the incentive to bring forward any rate cuts. Despite Fed Chair Powell being a card-carrying Republican, there may be a desire to try to keep Trump out by doing what it can to improve the economic backdrop.
The Fed meeting on Wednesday will be a major focus of attention, as will the Bank of England meeting on Thursday for UK investors. This past week saw no major surprises from the European Central Bank or Bank of Japan meetings.
That said, ECB President Lagarde was a bit more dovish than expected with her talk that the disinflation process and a slowdown in wage growth are now underway. This reignited hopes that the ECB could start cutting rates in April. As for the BOJ, rates were also left unchanged but it reinforced expectations that in March or April it will take another small step back from its super easy policy.
In China, the central bank announced a 0.5% cut in bank reserve requirement ratios as part of its continued gradual easing of policy. But attention was grabbed much more by Premier Li Qiang’s call for more forceful measures to support the stock market, with talk of a $278bn package.
This announcement was behind last week’s 3% rise in Chinese shares. However, the gain only recovered a small part of recent losses and investor reaction was sceptical. Previous such schemes have been of limited success and the feeling was that it just addressed the symptom, rather than the cause, of the underlying malaise afflicting the economy and stock market.
The other big source of interest this coming week will be the so-called Magnificent Seven tech stocks. Tesla reported last week and its results/guidance disappointed, confirming its status as the least magnificent of the seven. Its share price is down 14% over the week and as much as 55% from its 2022 high. Microsoft and Alphabet report on Tuesday and Apple, Amazon and Meta on Thursday. This will just leave Nvidia, the chip manufacturer and poster-child for AI hopes, left to report on 21 February.
Mega cap tech stocks have led the market’s gains over the last few weeks and months and the Magnificent Seven now make up as much as 28% of the market cap of the S&P 500, the primary US equity index. Their forthcoming results, along with the Fed, will be critical in determining whether the market rally can continue near term.
Rupert Thompson – Chief Economist