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US inflation

Market Update

11.03.2024

What happened last week?

Global 

  • OPEC+ extended its voluntary supply cuts to the middle of the year.
  • Bitcoin and gold touched new record highs.

Europe 

  • The European Central Bank (ECB) held interest rates steady.

Asia 

  • China set a 2024 growth target of “around 5%”.
  • Japan’s Nikkei 225 index breached the 40,000 level for the first time.

What does this mean?

OPEC+, in a bid to prop up falling oil prices, has been cutting and keeping production low since 2022. This included a voluntary output reduction of 2.2 million barrels per day – equivalent to roughly 2% of global oil demand – that was supposed to expire at the end of this month. But now that won’t happen. Facing a slowdown in demand and a huge surge in supply from the US, the cartel said last week it will extend those cuts, at least until the end of June. 

Rising expectations about falling interest rates have sent gold on a rally over the past few months. With some geopolitical risks intensifying, the metal – widely regarded as a safe-haven asset – saw its price touch a new record high last week. Coincidently, bitcoin – which some investors view as “digital gold” – also hit an all-time high, thanks to some relentless buying from the newly approved US spot bitcoin ETFs. 

As expected, the ECB held interest rates steady at an all-time high for a fourth consecutive meeting. It also lowered its projections for both inflation and economic growth, which bolstered traders’ expectations that rate cuts will begin this summer. In its latest outlook, the central bank forecasts 2.3% inflation this year (down from the 2.7% it predicted in December).

Meanwhile, it sees the economy expanding by just 0.6% in 2024 (versus 0.8% previously), with a rebound to come in 2025. 

China’s government set an official economic growth target of “around 5%” for 2024, mirroring last year’s objective. Analysts were quick to point out that the goal will be harder to achieve this time around. The growth in 2023, which came in at 5.2%, was much easier to attain because of a low base effect – i.e. the fact that pandemic restrictions flattened the economy the year before. What’s more, China’s still struggling with some of last year’s big troubles, including a property slump, seemingly entrenched deflation, and elevated levels of local debt. 

Global investors have been loading up on Japanese stocks after improvements in shareholder returns, a boom in earnings, and a weakening in the yen (which boosts the country’s exports). Corporate governance reforms and an endorsement by Warren Buffett last year have also helped to brighten the mood. Last week, Japan’s biggest backers had even more reason to celebrate after the Nikkei 225 climbed above the key psychological level of 40,000 for the first time ever. 

This week’s focus: US inflation

Nervous investors will be peeking through their fingers this week, as the latest US inflation report comes out. They’re on edge for a reason: the last one showed the annual pace of consumer price gains slowed by less than forecast in January. What was worse, if you looked at the monthly pace rather than the yearly, inflation was actually gaining steam, not losing it – and that was even if you excluded more volatile things like food and energy costs. 

All of this is likely to have a big impact on markets. Remember, the Federal Reserve (the Fed) has unleashed a barrage of interest rate hikes to tame the country’s hot inflation.

Economists expect February’s consumer price data, out Tuesday, to show the yearly pace holding steady at 3.1% – a good distance from the Fed’s 2% target. Until inflation falls a bit more, the central bank has said it’s in no rush to begin cutting interest rates, especially with the US economy still chugging along and not seeming to be in desperate need of the boost that comes from lower borrowing costs. Case in point: the average Wall Street forecast for US growth in 2024 has nearly doubled in the past few months, to 2.1%. 

That expected strength, coupled with lingering inflation, has pushed traders to rethink how many times the Fed might lower interest rates this year. Most now expect the first 0.25 percentage point chop to come in June or July, with two or three others to follow. That’s a big shift from January, when the consensus was for six trims for the year, starting next week. For what it’s worth, the Fed’s own forecast, the most recent of which was published in December, predicted three cuts. A lot has happened since that projection though, so, luckily, we’ll get a fresh update at the Fed’s meeting on March 20th. 

There is a silver lining (for the global economy, at least): China’s deflation could push down inflation rates in other parts of the world, as the country’s exporters cut prices on goods they sell abroad. We’ve already seen signs of that in the past couple of months, with prices falling at their fastest rate since the 2008 financial crisis. If China does end up exporting its deflation to the rest of the world, that could hasten central banks’ decisions to begin cutting interest rates.

  • The Week Ahead

    • Monday: Nothing major.
    • Tuesday: US inflation (February), UK labour market report (February).
    • Wednesday: China foreign direct investment (February), UK economic growth (January), eurozone industrial production (January).
    • Thursday: US retail sales (February), US producer price index (February).
    • Friday: US industrial production (February), China new home prices (February), US consumer sentiment (March).

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