Shaw and Partners

US stocks posted losses for the week with hotter-than-expected inflation reports weighing. On Tuesday the Labor Department reported that consumer prices had risen by 3.1% year-on-on-year in January, down from the prior month but ahead of expectations, while core inflation was also higher-than-expected. Friday’s report, where January’s producer price index saw its largest increase in five months, further prompted investors to dial back rate cut expectations. The CME FedWatch tool indicates just a 10% chance of a March cut from the Federal Reserve, and even a move in May is uncertain.

For the week the Nasdaq Composite dropped 1.3% with rate sensitive technology stocks taking some of the biggest hits. Both the Dow Jones and S&P 500 hit record highs earlier in the week, with the weakness in tech offset by gains in the broader market. The S&P 500 achieved its eleventh record closing high this year but a pullback on Friday pushed it to a weekly loss of 0.4%, its first weekly decline since the start of the year. The yield on the 10-year Treasury note rose for the week, spiking after the two inflation reports. On Friday it had risen as high as 4.33%, its highest level since 1 December, before paring gains to end the week at 4.29%.

European equities managed to advance for the week which was packed with earnings releases and growing hopes that rate cuts from the European Central Bank wouldn’t be too far away. For the week the pan-European STOXX 600 rose 1.4% to hit a fresh two-year high, fuelled by a 2.5% rise in miners. Meanwhile the French CAC and German DAX indexes both hit all-time highs on Friday. Comments from ECB policymakers over the week signalled that the central bank shouldn’t put off rate cuts for too long. The UK FTSE 100 added 1.8% for the week even with data revealing that the economy fell into a technical recession for the second half of 2023. In more positive news the consumer price index was unchanged at 4% in January, lower than expectations.

Also slipping into a technical recession was Japan’s economy, which unexpectedly declined by 0.4% in the final quarter. This meant that its economy is now the world’s fourth larges, falling behind Germany. Despite this Japan’s Nikkei 225 continued to test its 34-year highs and advanced 4.3% for the week, supported by yen weakness. In a holiday-shortened week in Hong Kong, the Hang Seng gained 3.8%. Mainland China indices remained closed for the Lunar New Year holiday.

Weekly macro highlights

US inflation hotter-than-expected in January

US headline CPI inflation rose 3.1% year-on-year (YoY) in January, below the 3.4% registered in December but above market expectations for a 2.9% increase. The hotter-than-expected inflation reflected a 0.3% month-on-month (MoM) increase, over two thirds of which was accounted for by a 0.6% MoM increase in the shelter price index. Energy prices fell 4.6% YoY in January and food prices rose 2.6%. Excluding these components, core CPI inflation rose 3.9% YoY in January, unchanged from December’s print and above market expectations for a decline to 3.7%. Over two thirds of the 12-month increase in core inflation was a result of the shelter price index, which rose 6.0% compared to January 2023. The Fed looks closely at supercore inflation, which measures core services excluding shelter prices. This measure rose 0.85% MoM in January, the largest monthly increase registered since April 2022, driven by price increases for transportation and medical care services.

Japan enters technical recession in Q4

Japan’s GDP fell 0.1% quarter-on-quarter (QoQ) in Q4 2023, below market expectations for a 0.3% expansion. The data marked an improvement on the 0.8% QoQ contraction registered in Q3, though it also represented the second consecutive quarter of negative growth meaning Japan entered a technical recession. Domestic demand contributed -0.3 percentage points to the -0.1% QoQ change in GDP, with expenditure falling in both private and public demand. The decline in private consumption was driven by decreased household spending, while in public consumption it predominantly reflected lower investment. The negative contribution of domestic demand was partially offset by a 0.2 percentage point positive contribution from net exports of goods and services. Exports rose 2.6% QoQ, offsetting a 1.7% QoQ increase in imports, which are a subtraction from GDP. Japan’s GDP rose 1.9% year-on-year in 2023, with 1.1% and 1.0% QoQ expansions in Q1 and Q2 respectively offsetting the contractions in Q3 and Q4.

UK inflation unchanged in January, Q4 GDP contracts

UK headline CPI inflation rose 4.0% year-on-year (YoY) in January, unchanged from December, according to data published by the Office for National Statistics (ONS). On a month-on-month (MoM) basis, headline inflation fell 0.6% in January. Both readings came in below market expectations of a 4.2% YoY increase and 0.3% MoM fall. Average food prices fell 0.4% MoM, marking the first decline in prices since September 2021 and the largest drop since July 2021. Core CPI inflation, which excludes energy, food, alcohol, and tobacco, rose 5.1% YoY in January, the same rate registered in December and below market expectations of a 5.2% increase. The ONS also released UK GDP data last week, which showed GDP fell 0.3% quarter-on-quarter in Q4. All three main sectors of the economy contracted in Q4 2023. The data marked the second consecutive quarterly GDP contraction, following a 0.1% decline in Q3, meaning the UK is in technical recession.