Market Update – 28th February 2024.

Investors are cautiously awaiting key economic data from Japan, the US, and Europe this week.

In the US, markets have taken a breather after last week’s rally, gearing up for a busy week featuring the latest Q4 GDP estimate, the Federal Reserve’s preferred measure of inflation, Core PCE as well as manufacturing PMIs.

Policymakers will be closely watching PCE index due out on Thursday due to its focus on actual consumer spending. With January’s CPI and PPI surpassing expectations, the Fed requires additional evidence of inflation’s downward trajectory toward the 2% target. Core PCE is expected to increase by 0.4% month-on-month, amounting to an annual rate of 2.8% in January 2024, just shy of December’s 2.9%.

With the policymakers maintaining a data dependent stance, key releases this week will be crucial to determine the course of policy going forward and may alter investors rate cut bets.

Japanese equities remain robust after reaching record highs last week. Despite a third consecutive monthly slowdown in core inflation in January, the latest inflation prints exceeded forecasts, holding steady at the Bank of Japan’s 2% target. The slowdown, influenced by a significant drop in energy costs, reflects the base effect of last year’s sharp rise and government subsidies. The data unnerved some in the market despite alignment with the 2% target whilst others added to bets on an exit of negative interest rates in the coming months.

As we approach yet another deadline to approve funding, a threat of a possible US government shutdown emerges, however, it’s important to remember the past patterns. The market has seen this dance before – last-minute agreements, debt refinanced, crisis averted. It’s become almost routine. US President Joe Biden is taking proactive steps to prevent a government shutdown, meeting with top Democrats and Republicans in Congress this week.

Also in the US, durable goods orders experienced a notable decline in January 2024, surpassing market expectations. The slump, primarily due to a fall in commercial aircraft, adds to recent data indicating a broader economic slowdown. While seasonal factors may contribute to these results, the tight labour market and elevated inflation suggest the Federal Reserve is unlikely to start cutting interest rates before June. Data this week also revealed that US consumer confidence dropped for the first time in four months. The Conference Board’s latest data shows a decrease to 106.7 in February, signalling concerns about the economy, job market, and financial conditions.

There were also signs of consumer confidence falling in Ireland. The Credit Union Consumer Sentiment Index in Ireland decreased somewhat from 74.2 in January 2024 to 70.2 in February 2024 as consumers continued to struggle with cost-of-living pressures despite lowering inflation.

In China, we have seen some noise surrounding the property sector. The large property developer Country Garden is facing liquidation pressures adding to what we believe to be short term noise in markets. Unsurprisingly this has knocked sentiment, however it’s important to remember that China has introduced numerous measures to support and backstop issues in the sector. Minor pull backs in the markets present buying opportunities for long term investors as we have seen markets bounce back quickly.

Still to come this week data wise, the latest estimate for US Q4 GDP, PCE is due out tomorrow and manufacturing PMIs on Friday. Also due out are Eurozone inflation and manufacturing PMI data from across Europe.

Kate Mimnagh, Portfolio Economist

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