Weekly house view | Bumpy ride towards 2% inflation

Weekly house view | Bumpy ride towards 2% inflation

The CIO's view of the week ahead.

The week in review

The release of consumer and producer inflation figures for January that showed US prices rises slowing less than expected briefly jolted markets, as the figures suggested the Fed will remain uncomfortable about cutting rates in the near term. Yet the damage was limited (the S&P 500 was down 0.35%[i] over the week in USD) as good corporate results continued to roll in and there were stirrings in M&A activity. Outside the US, Japan’s Nikkei 225 rose to its highest level since the start of 1990. By further clouding the outlook for the timing of Fed rate cuts, the January inflation numbers caused a sell-off in US Treasuries, with the 10-year US Treasury rising to 4.29%, its highest level since end-November—while the inching up of one-year inflation expectations put more pressure on short-term yields. Short-term German yields also rose, although investors seem to have solidified their bets for June rate cuts. In currencies, the yen weakened more as disappointing Q4 GDP numbers were seen as complicating the Bank of Japan’s plans for normalising its monetary policy.

Quote of the week

Paolo Gentiloni, European Commissioner for Economy, on the Commission’s updated forecasts for the European economy: “The rebound expected in 2024 is set to be more modest than projected three months ago, but to gradually pick up pace on the back of slower price rises, growing real wages and a remarkably strong labour market. Investment is expected to hold up.”

Key data

The US consumer price index (CPI) came in at an annual 3.1% in January, slowing less than expected from 3.4% in December. Annual core CPI was unchanged at 3.9%. The US producer price index declined only slightly to an annual 0.9% in January from 1.0% in December. January retail sales dipped by 0.8% from December and industrial production by 0.2%. According to preliminary estimates, Japan’s GDP contracted by an annualised 0.4% in Q4. This was the second consecutive quarter of contraction, with GDP declining an annual 3.3% in Q3. The UK economy also fell into a technical recession, with GDP slipping 0.3% in Q4 from the previous quarter, following 0.1% in Q3. But there was some good news in the euro area, with industrial production up an annual 1.2% in December, the first annual rise in 10 months.

[i] Source: Pictet WM AA&MR, Thomson Reuters. Past performance, S&P 500 Composite (net 12-month return in USD): 2019, 31.5%; 2020, 18.4%; 2021, 28.7%; 2022, -18.1%; 2023, 26.3%
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