Shaw and Partners

It was another positive week for US stocks, with the major indices notching a fourth consecutive weekly gain. In a busy week for earnings, results from the tech mega caps were mixed. Alphabet’s ad growth fell short of expectations while Apple’s better-than-expected quarterly revenue was overshadowed by a sales miss in China. Meanwhile Amazon climbed higher after its earnings topped expectations and Meta Platforms jumped over 20%, adding over $204.5bn to its market value, the largest such one-day gain for any US company. Advances in tech stocks boosted the major equity indices, with the Nasdaq up 1.1% and the S&P 500 up 1.4%, hitting an all-time high. It was however notable that gains were narrow, with the equally weighted S&P 500 seeing a small weekly loss.

Also keeping investors on their toes was the latest Federal Reserve meeting. The central bank left interest rates on hold, as expected, however chairman Jerome Powell signalled that a March rate cut was not likely. Hopes of an imminent cut were also dashed further following the release of the employment report on Friday. January non-farm payrolls came in above expectations at 353,000 jobs and average hourly earnings also surprised to the upside. While the jobs report pushed up the yield of the 10-year Treasury, for the week overall it ended lower.

The pan-European STOXX 600 ended the week roughly flat, having touched a fresh two-year high earlier in the week, supported by earnings reports, before losing steam. Most regional indices experienced slight losses although Italy’s FTSE MIB advanced 1.1%. Eurozone annual inflation eased to 2.8% in January, although core inflation came in slightly higher than expected, and could make European Central Bank policymakers cautious about their rate cut approach. Separately the eurozone economy narrowly avoided a technical recession, with fourth quarter GDP coming in flat.

Japan’s Nikkei 225 climbed 1.1% for the week, having seen its best monthly performance since November 2020. The weekly gain came despite a strengthening yen against the US dollar, given the Fed’s pushback on a March cut as well as the hopes for the Bank of Japan to normalise its monetary policy. Chinese equities were once again lower, unable to build upon the prior week’s gains. The Shanghai Composite fell over 6% in its worst week since 2018 while the Hang Seng fell 2.6%. Property market concerns continue to weigh with a Hong Kong court ordering China Evergrande into liquidation, and raises the question over whether the ruling will be upheld in mainland China. Purchasing managers’ index data was mixed, with the official manufacturing PMI remaining in contraction for January, while Caixin’s PMI beat expectations and saw its third consecutive month of expansion.

There was also plenty of central bank action in Latin America. Brazil cut its benchmark Selic rate by 50bps to 11.25% and also indicated that it would continue with such a cut for the following two meetings. Colombia cut its benchmark by 25bps to 12.75%, while Chile’s central bank was even more dovish and delivered a 100bps cut. Despite the cuts, for the week MSCI’s Latin America index ended 0.7% lower, and saw losses in January as investors scaled back US rate cut expectations and China economic woes which weighed on commodity prices.

Weekly macro highlights

Fed holds rates steady in January

The Federal Open Market Committee (FOMC) decided to keep the Fed funds rate steady, between 5.25% and 5.50% at its meeting on 31 January. The FOMC signalled that it was not ready to ease monetary policy, with inflation continuing to run above its 2% target. Chair Jerome Powell stated that a March rate cut was unlikely, with policy members determined to see further data indicating a clear declining inflation trend towards its target before cutting rates. The FOMC also noted that job gains have moderated, however, last weeks’ non-farm payroll data defied this trend. The US labour market added 353,000 jobs in January, almost double market expectations of a 180,000 increase. Furthermore, December’s figures were revised upward from 216,000 to 333,000. A 52,000 increase in government jobs and a 38,000 gain in health care jobs were the biggest contributors to January’s data. The unemployment rate was unchanged in January at 3.7%.

BoE leaves rates unchanged in February

The Bank of England (BoE) Monetary Policy Committee (MPC) voted to keep the Bank Rate unchanged at 5.25% at its meeting on 01 February. Six members voted in favour of the decision, with two preferring to hike rates and one preferring to cut them. This marked a marginal dovish shift relative to the December meeting when six members voted to maintain the Bank Rate and three voted to raise it. The shift in tone was supported by updated inflation projections, showing the BoE expect inflation to reach its 2% target in Q2 this year. However, this is anticipated to be driven by base effects from falling energy prices, and inflation is expected to rise again in the second half of the year. Nonetheless, the MPC removed its hiking bias in its post meeting statement, highlighting that “the Committee will keep under review for how long the Bank Rate should be maintained at its current level”.

Eurozone avoids Q4 recession

The eurozone avoided a technical recession, defined as two consecutive quarters of negative growth, in Q4 according to flash data published by Eurostat. Quarter-on-quarter (QoQ) GDP is estimated to have been unchanged in the final quarter of 2023, an improvement from the 0.1% contraction in Q3. There were large divergences within the eurozone. Portugal recorded the largest increase in GDP compared to the previous quarter, with a 0.8% expansion, followed by Spain with a 0.6% increase. Contrasting this, Ireland saw a 0.7% QoQ contraction of GDP in Q4 and German GDP fell by 0.3%. Overall, the data contributed to an annual growth rate of 0.5% in the eurozone in 2023. The World Economic Outlook Update released last week saw a downward revision to the IMF’s estimate for eurozone GDP growth in 2024 from 1.2% to 0.9%. Nonetheless, the forecast marks an improvement relative to 2023 as falling inflation is expected to boost household consumption.