Market Update

The equity markets experienced a turbulent week, with various factors influencing the fluctuations. Rishi Sunak's Budget Statement on March 3 aimed to strike a balance between reducing the UK's massive government borrowing, reminiscent of World War levels, and supporting economic recovery without tightening fiscal measures significantly.
Interestingly, what moved the markets this week was not the UK budget but a combination of US economic data and statements from Fed Chair, Jay Powell. There's a collective anticipation worldwide, akin to a coiled spring, as people eagerly await the lifting of lockdown restrictions, enabling social interactions, shopping, and dining out. Recent discussions have centered around potential inflationary pressures resulting from these developments, coupled with US fiscal stimulus.
These inflationary concerns received an unexpected boost when OPEC members decided to maintain their reduced oil production levels, causing the price of a barrel of Brent crude to rise by $5, reaching nearly $70. This increase has significant inflationary implications, affecting not only fuel prices but also various everyday products, including plastics, household items, clothes, and the energy required for food and metal production.
Despite this, for inflation expectations to become destabilized, a sustained period of high inflation must be assumed and acted upon. However, our belief is that this scenario is unlikely. While the global economy is poised for a robust recovery in the next year as lockdowns ease, medium-term factors supporting low or no inflation, such as automation leading to reduced prices and limited wage growth, remain unchanged. Consequently, we do not anticipate a sustained inflation rate above the 2% target, even though headline inflation may rise due to the distorted oil prices in the coming months.
Remarkably, the current oil price is merely back to its pre-coronavirus outbreak level in January 2020, indicating a semblance of normalcy in the market. Additionally, the sentiment in the equity markets was bolstered by Jay Powell's reassurance that the US central bank has no imminent plans to raise interest rates. Despite the addition of 379,000 jobs in February and a reduced unemployment rate of 6.2%, Powell emphasized that the underlying data, including the broader U-6 figures, which account for various employment aspects, remained concerning at 11.1%.
Looking forward to the upcoming week, market watchers are focused on key economic indicators, including UK industrial and manufacturing production, UK GDP for January, US and Chinese CPI inflation data, US weekly jobless claims, the University of Michigan consumer sentiment index, and an ECB monetary policy meeting. These events will likely shape market movements and investor sentiment in the days to come.