Shaw and Partners

Attention for the week was on the release of the Federal Reserve’s preferred inflation gauge, the core personal consumption expenditures (PCE) price index, so that markets could try and gather further clues for the path of interest rates. Released on Thursday, the core PCE index rose 2.8% year-on-year in January, matching expectations and prompting stocks to jump higher. Gains continued on Friday, with markets shrugging off comments from Fed policymakers who largely reiterated that they were in no rush to cut rates. This coming week chairman Jerome Powell will testify before Congress, so that may provide additional hints, while Friday will see the release of February’s job report for a further indicator on the health of the economy.

For the week, the S&P 500 managed to end at a record high, its fifteenth of the year and climbed 1%. Chipmakers and tech names continued to fuel a large part of the rise, although gains were broad-based across sectors. The tech-heavy Nasdaq was up 1.7% for the week and on Thursday it managed to hit a fresh record high for the first time since 2021. Meanwhile the Dow Jones index ended marginally lower. Treasury yields moved lower, with the 10-year yield ending at 4.19% for the week. The Institute for Supply Management’s manufacturing Purchasing Managers’ Index (PMI) fell more than expected in February, dropping to 47.8, also pressuring yields.

European markets also climbed to new heights, with the pan-European STOXX hitting an all-time high on Friday, helped by rate sensitive stocks. For the week the index only eked out a 0.2% gain, but it still extended its winning streak to six weeks. So far this year, the German DAX has been one of the top European performers and the index also ended the week at a fresh high. In contrast French and UK indices were lower for the week. Sentiment was somewhat dampened after eurozone inflation figures declined by less than expected, with an economic sentiment indicator also unexpectedly declining and the eurozone manufacturing PMI remained in contraction.

After managing to top its high after 34 years the previous week, Japan’s Nikkei 225 continued to advance, ending the week just shy of the 40,000 mark. Japanese stocks have benefited from the weaker yen and corporate governance reforms. Positive momentum was also seen in China, who saw a strong February after a weaker start to the year. Stocks found support in hopes for further stimulus measures from the government. For the week the Shanghai Composite gained 0.7%, however Hong Kong’s Hang Seng lost 0.8%. Economic data was mixed with the official PMI reading falling deeper into contraction while the private Caixin measure beat expectations and remained in expansion for a fourth month.

Weekly macro highlights

US PCE inflation declines in January

US headline PCE inflation rose 2.4% year-on-year (YoY) in January, below the 2.6% YoY increase registered in December. Goods prices fell 0.5% YoY, below the 0.2% YoY increase in December. This reflected a 2.4% YoY drop in durable goods prices which was partially offset by a 0.5% YoY increase in non-durable goods prices. Services prices rose 3.9% YoY, unchanged from the increase recorded in December. Food prices rose 1.4% YoY in January and energy goods and services prices fell 4.9% YoY. Excluding food and energy, core PCE inflation, which is the Federal Reserve’s preferred measure of price pressures in the US, declined from 2.9% YoY in December to 2.8% YoY in January, in line with market expectations. In month-on-month (MoM) terms, core PCE inflation rose 0.4% in January, its largest increase since February 2023. The “supercore” measure tracked closely by the Fed, which measures services prices excluding energy and housing, rose 0.6% MoM.

Japanese inflation falls in January

Japanese headline CPI inflation fell from 2.6% year-on-year (YoY) in December to 2.2% YoY in January. Core inflation, which excludes fresh food and is the measure focused on by the Bank of Japan (BoJ), declined from 2.3% YoY to 2.0%. This measure of price pressures was above market expectations for a decrease to 1.8% YoY and marked the 22nd month that core inflation has been at or above the BoJ’s 2% target. Energy prices fell 12.1% YoY, a deeper decline than the -11.6% registered in December. Excluding fresh food and energy prices, core-core inflation fell from 3.7% YoY to 3.5% YoY. The BoJ has been closely watching services prices as a key measure of underlying domestic inflationary pressure ahead of a possible move to end its negative interest rate policy in 2024. In January, services inflation fell from 2.3% YoY to 2.2%, while goods inflation fell from 2.8% YoY to 2.1%.

Swiss GDP expands in Q4

Swiss GDP rose 0.3% quarter-on-quarter (QoQ) in Q4 2023, in line with the expansion registered in Q3 and above market expectations for 0.1% growth. The manufacturing sector was a drag on GDP growth, with output falling 0.1% QoQ following a 0.2% increase in Q3. This was driven by chemical and pharmaceutical industry output declining due to weaker export demand. Other manufacturing sectors registered positive output growth in Q4, with a 4.3% QoQ increase in value added in the energy sector the most notable increase. Positive GDP growth in Q4 was predominately supported by the services sector. Incoming tourist activity drove a 3.5% QoQ increase in value added in the accommodation and food services sector. The rise in tourism also benefited the transport and communication sector, which saw a 0.4% increase in value added in Q4. The provisional data published by the State Secretariat for Economic Affairs indicated the Swiss economy grew 1.3% in 2023.