Shaw and Partners

US stocks began the holiday-shortened week on cautious footing as investors braced for earnings from Nvidia. The chipmaker however posted a blowout earnings report after the bell on Wednesday, reigniting optimism around artificial intelligence stocks. On Thursday the chipmaker added a record $277bn to its market capitalisation and the following session it briefly topped the $2tn level. Nvidia’s rally helped propel markets and optimism carried across to other areas across the globe. For the week the S&P 500 added 1.7% and ended at a fresh record high. The Dow Jones was also up at an all time high and added 1.3% for the week, while the tech-heavy Nasdaq was up 1.4%.

The focus around AI overshadowed worries over central banks holding interest rates higher for longer. Minutes from the Federal Reserve’s last policy meeting reinforced the expectation for no rate cut by the central bank at its next meeting in March, and this was further supported by comments from policymakers, with Governor Christopher Waller saying that he wanted at least two more months of data to verify whether January’s uptick in inflation was a “speed bump or a pothole”. This week the Fed’s preferred inflation gauge, the personal consumption expenditures index, will be released to give the latest update on price pressures. For the week the yield on the 10-year Treasury yield ended little changed following a dip on Friday.

Another key event of the week was that, at long last, Japan’s Nikkei 225 closed at a record high. On Thursday the index managed to surpass the intraday peak low 38,957 points last set in December 1989. The index was closed on Friday for the Emperor’s Birthday holiday, ending up 1.6%. Its ascent has been driven by weakness in the yen, as well as improving corporate earnings and signs of a pickup in inflation. Chinese equities were also able to see another positive week, with the Shanghai Composite advancing 4.9% and the Hang Seng up 2.4%. There was growing optimism around more supportive stimulus measures from Beijing, with the People’s Bank of China cutting its 5-year Loan Prime Rate.

The pan-European STOXX 600 added 1.2% for a week, also hitting a record high for the first time since 2022 and seeing its fifth consecutive weekly gain. Most regional indices posted strong gains, although the UK FTSE 100 lagged and ended little changed owing to weakness in miners and energy names. Economic data for the week was mixed, with Germany’s 0.3% contraction of GDP in the fourth quarter being confirmed, while provisional estimates for the eurozone composite PMI rose to 48.9 in January, although still in contractionary territory.

Weekly macro highlights

US PMIs signal February expansion

The US composite PMI index declined from 52.0 in January to 51.4 in February. This represented the second fastest rate of growth since July 2023 and remained above the 50 level separating expansion and contraction. The preliminary data from S&P Global reflected expansion in both services and manufacturing sectors. Services business activity fell from 52.5 to 51.3, remaining above 50, while manufacturing output rose from 49.3 to 52.3, entering expansion territory and reaching a 10-month high. Survey respondents in both sectors reported optimism for activity over the next twelve months in February, as improved supply chains increased production in the manufacturing sector and service sector output rose for the thirteenth consecutive month. Input prices rose at the weakest pace since October 2020, with cost pressures easing, though remaining elevated. Output prices rose at a slightly faster rate than in January. Job creation increased in both sectors, with hiring in goods producers the fastest since September 2023.

UK flash PMIs signal growth in February

The UK private sector expanded at a faster rate in February than in January, according to flash PMI data. The composite output PMI rose from 52.9 to 53.3, marking a nine-month high. This reflected an increase in the manufacturing output index from 45.5 to 47.3, with the services output index remaining unchanged at 54.3. Notably, although the manufacturing output index improved in February, it remains below the 50 level that separates expansion and contraction, while the services sector remains in expansion. New order volumes rose for the third consecutive month at the composite level, largely due to new work received by service sector businesses. In line with this, optimism regarding the year ahead for output growth rose to the highest level since February 2022. Despite improving demand conditions and optimism, firms remained cautious about increasing employment in February. The composite employment index remained slightly above 50, at 50.7, but was unchanged from January.

People’s Bank of China cuts 5-year LPR

The People’s Bank of China (PBoC) cut its 5-year Loan Prime Rate (LPR) by 25 basis points to 3.95% on 20 February. The 1-year LPR was left unchanged at 3.45%. While it is not rare for the 1-year LPR to be reduced without a similar move for the 5-year LPR, the move by the PBoC marked the first time since the LPRs were introduced in 2019 that the 5-year rate has been reduced solitarily. It also marks the largest rate cut since the LPRs’ introduction, with the PBoC tending to change rates in steps of 10 basis points. The 5-year LPR is the rate used as a reference for mortgage rates in China, with the PBoC’s decision likely aimed at providing support to China’s struggling real estate sector. Data published by the National Bureau of Statistics last week showed that new house prices fell 0.7% year-on-year in January, marking the seventh consecutive decline.