Weekly Market Update - 9th April 2024

Buy land, they’re not making it anymore,” said Mark Twain. In fact, land was about the only thing investors weren’t buying in the first quarter of 2024, as stocks, gold and cryptocurrencies all surged to record highs.

That exuberance has been founded on the belief that the global interest-rate cycle is turning. The coming quarter will prove whether that confidence is justified. Last week provided some more clues.

The holiday-shortened week began with some brighter news in China. Chinese shares soared, as new figures showed the country’s manufacturing activity expanded in March at its fastest pace in over a year, and business confidence hitting an 11-month high. The results followed a recent better-than-expected export and retail sales data, yet analysts say policymakers will need to deliver more stimulus if the economy is to hit the government's ambitious growth target of around 5%.

Figures released on Wednesday revealed that eurozone inflation fell unexpectedly last month, slowing to 2.4% from 2.6% in February as food, energy and industrial goods prices pulled down the headline figure. The news strengthened the case for the European Central Bank to start unwinding its record interest rate hikes. The central bank meets this week, but policymakers have repeatedly indicated June as the decisive meeting. Investors are betting on almost no chance of a cut this week but have fully priced in a June move.

Separate data showed unemployment in the region at a record low of 6.5%, suggesting that the job market remains robust. Policymakers pushing for a cut have argued that economic growth remains very weak, as the eurozone has been flirting with recession for six quarters now.

Yet, the main focus for investors last week was on the US, the world’s largest economy. Key US stock indices hit two-week lows on Tuesday as solid economic numbers raised doubts about whether the Federal Reserve could deliver the three rate cuts outlined in its latest forecast. New orders for US-manufactured goods rebounded more than expected in February and a key survey showed growth in the manufacturing sector for the first time since September 2022.

The recovery is good news for the economy’s growth prospects, but a rise in raw material prices risks a pick-up in goods inflation further down the line, which would have implications for the path of interest rates this year.

Mark Dowding of BlueBay Asset Management argues that markets have been too quick to write off the US economy and to assume that benign inflation would prompt an extended monetary easing cycle. “We will be meeting policymakers in Washington in the coming week, though our sense is currently that Federal Reserve Chair Powell is eager to gamble on a soft landing, in order to secure an enviable legacy. Moreover, there is a desire to start to cut rates before the election cycle gets into full swing. On this basis, we still think that the Fed may cut in July, but that we are likely to see only one or two rate cuts this year, unless the pace of economic activity cools materially.”

In contrast to the manufacturing data, figures released on Wednesday showed that growth in the US services industry slowed further in March and that services inflation continued to moderate. Higher wages in the services industry are the main driver of inflation.

But the main event for market watchers came on Friday with the release of the latest US jobs figures. Employers added more than 300,000 jobs last month, blowing past forecasts of around 200,000 and registering the biggest monthly gain in almost a year. The labour market has benefited from a rise in immigration over the past year, and also been helped by government spending in areas such as high-tech manufacturing and infrastructure.

The unemployment rate fell to 3.8% and has now remained below 4% for 26 straight months, the longest stretch since the late 1960s.

Analysts were quick to point out that the excess energy in the economy, indicated by the strong jobs growth could make it difficult for the Fed to return inflation to its 2% target. The data also pumped expectations that the Fed can take its time and delay cutting interest rates, given that a recession is nowhere in sight.

The mixed economic data saw leading US stock indices post modest declines by the end of the week, and money markets now pricing in just two rate cuts this year. The next, and key, round in the rate-cut guessing game comes with this week’s release of the latest US inflation numbers.