Shaw and Partners

US equities saw small losses for the week with inflation data in focus. Tuesday saw the release of the eagerly awaited February consumer price index (CPI), which rose 0.4% month-on-month, matching expectations. Even a larger-than-expected uptick in the core index didn’t really prompt a sell-off, however markets were more moved by the producer price index (PPI) released later in the week. The PPI increased 0.6% month-on-month for February, its biggest increase in six months and coming in ahead of expectations. While inflation has greatly come down from its peaks, the last leg in getting back to the Federal Reserve’s target is proving harder to achieve and the latest data prompted markets to dial back rate expectations. While the central bank is not expected to move in its March meeting this week, investors will be paying close attention to see whether or not June’s rate cut is still on the cards.

The S&P 500 dropped 0.1% for the week, seeing its first back-to-back weekly loss since October. Weakness in Nvidia and other chipmakers, taking a breather from their stellar run so far this year, weighed on technology stocks, as well as the prospect of interest rates remaining higher for longer. Faring better was the energy sector, which managed to outperform given higher oil prices. The tech-heavy Nasdaq index fell 0.7% while the concentrated Dow Jones ended marginally below the flatline, having touched a record high on Wednesday. Bond yields climbed on the inflation data, with the 10-year Treasury note up to end the week at 4.31%.

In contrast to the US, European markets were higher for the week to extend their winning streak. The pan-European STOXX 600 was up 0.3%, notching its eighth consecutive gain. Regional indices’ gains were more impressive, with France’s CAC 40 up 1.7%, achieving new highs once more and Italy’s FTSE MIB rising 1.6%. Looking at bonds, on Wednesday the spread between the 10-year Italian and German government bonds narrowed to its lowest level since November 2021 amid improving prospects for Italy’s economy whilst Germany’s has stalled. The UK FTSE 100 added 0.9% with the economy showing signs of recovery from its mild recession, expanding 0.2% in January.

Chinese markets experienced an uptick, as recent supportive measures from the government have lifted confidence around the economy. Inflation data released during the week was mixed, with the CPI adding 0.7% year-on-year in February, its first time moving out of deflationary territory since August, supported by consumption around the Lunar New Year. Meanwhile, factory gate prices dropped by a larger-than-expected 2.7%. The troubled property sector showed little sign of improvement, with new home prices falling for an eighth consecutive month. Furthermore, Moody’s downgraded developer China Vanke to junk status while Country Garden missed a coupon payment on a yuan bond for the first time.

Japan’s Nikkei 225 slipped further away from its recent record highs, dropping 2.5% for the week, its largest fall since December. The spring shunto wage negotiations have seen the biggest rise in average raises for labour unions since the early 1990s. This raised hopes that wage growth could push up inflation and spur the Bank of Japan to exit its negative rate policy. Eyes will be on the central bank, with a hike potentially announced at its meeting this week or in April. The yen weakened against the US dollar over the week.

Both MSCI’s indices for Latin American equities and currencies ended the week with gains, even after the US dollar picked up following the hotter-than-expected US inflation data. On Thursday, Argentina’s Senate voted to reject President Milei’s emergency decree to deregulate the economy, in a blow to his reform agenda. Earlier in the week Argentina’s central bank cut its benchmark interest rate to 80% from 100% as it tries to reduce its liabilities. For the week the Merval index added 6.7%. Another gainer was Peru's index which rose 2.7%. In a historic move, Peru’s Congress voted in favour of returning to a bicameral parliament, establishing a Chamber of Deputies and Senate.

Weekly macro highlights

US CPI inflation rises in February

US headline CPI inflation rose from 3.1% year-on-year (YoY) in January to 3.2% YoY in February, above market expectations for no change. In month-on-month (MoM) terms, headline inflation rose 0.4%, having increased 0.3% in January. Food prices were unchanged MoM in February, while energy prices rose 2.3% MoM, largely reflecting a 3.8% increase in gasoline prices. Excluding food and energy, core CPI inflation rose 0.4% MoM in February, unchanged from January’s monthly increase. This contributed to a 3.8% YoY increase in core inflation, below the 3.9% registered in January but above market expectations for a 3.7% rise. Shelter prices rose 0.4% MoM in February, making the largest contribution to the MoM increase in core inflation. Beyond this, 3.6% and 0.9% MoM increases in airline fare and motor vehicle insurance prices respectively were among the notable changes. February’s CPI data marked the last inflation reading ahead of the Fed’s meeting on 20 March.

UK unemployment rises in January

The number of employees on payrolls in the UK rose by 15,000 between December 2023 and January 2024 according to data published by the Office for National Statistics (ONS). The number of persons claiming unemployment benefits rose by 16,800 in February. A closely watched indicator of tightness in the labour market, the unemployment rate, rose from 3.8% in October-December to 3.9% in November-January. In line with a marginally looser labour market, private sector wage growth excluding bonuses declined from 6.2% YoY in October-December to 6.1% in November-January. This marked the lowest annual rate since October 2022. The ONS also released its monthly estimate of UK GDP last week, with GDP growth estimated to have risen 0.2% month-on-month (MoM) in January following a 0.1% contraction in December. The data reflected 0.2% and 1.1% MoM increases in services sector and construction sector output respectively, offsetting a 0.2% MoM decline in production sector output.

Brazilian inflation falls in February

Brazilian Extended National Consumer Price Index (IPCA) inflation fell from 4.51% year-on-year (YoY) in January to 4.50% YoY in February according to data published by the Brazilian Institute of Geography and Statistics (IBGE). The data marked a meaningful decline from the 12.13% peak in inflation registered in April 2022 and brought headline inflation back within the Banco Central do Brasil’s (BCB) 1.5-4.5% target range. Brazilian inflation data are not seasonally adjusted, making monthly comparisons difficult. Nonetheless, it was notable that month-on-month (MoM) IPCA inflation rose 0.83% in February, the largest increase since the 0.84% registered in February 2023. The largest contribution to the monthly increase came from education, which accounted for 0.29 percentage points of the 0.83% rise, with many schools and universities raising fees ahead of the start of the Brazilian academic year. Food and beverages prices also made a significant contribution, accounting for 0.20 percentage points of the MoM headline inflation increase.