Market Update

The highly anticipated US PCE data released on Thursday met expectations, leading to positive market reactions. The core PCE rate, which is the Federal Reserve's preferred inflation gauge, cooled to 2.8% year-on-year in January, down from 2.9% in December 2023. Monthly prices increased by 0.4% in January, keeping potential mid-year interest rate cuts on the table. This data provided a reassuring contrast to the earlier consumer price index report from the Labor Department, which had shown core prices exceeding predictions at 3.9%, sparking concerns.
The journey toward achieving the 2% inflation target has been a bumpy one, with markets initially being overly optimistic and pricing in aggressive rate cuts. As we have consistently highlighted, policymakers remain data-dependent, with their primary goal being to achieve price stability. Recent months have seen a slowdown in disinflation momentum, underlining the Fed's reluctance to cut rates until they are confident that inflation is moving toward the 2% target. Additionally, this week's data revealed that the latest estimate of Q4 GDP was revised slightly down to 3.2% from 3.3%. Policymakers will continue to maintain restrictive rates as they await further evidence of moderation in the labor market and wages.
Turning to Europe, inflation declined to 2.6% year-on-year in February 2024, down from 2.8% in the previous month, which was slightly above market expectations of 2.5%. The core rate, which excludes volatile items such as food and energy prices, also moved lower for the seventh consecutive month to 3.1%, again exceeding forecasts of 2.9%. Inflation in Ireland rose by 2.2% year-on-year in February 2024, slowing from a 2.7% increase in January.
The European Central Bank (ECB) will be closely monitoring these developments as it charts its policy course for the remainder of the year. Despite expectations in the markets for rate cuts in June due to many bloc countries stagnating or entering a recession, the ECB is unlikely to cut rates before the Fed.
Meanwhile, in China, manufacturing activity contracted in February, but non-manufacturing PMI rose to the highest level since September last year. The country continues to grapple with its persistent property crisis despite Beijing's concerted efforts to stabilize the sector. Recent developments highlight increasing pressure on policymakers to escalate support measures. In an effort to inject liquidity into the market, Chinese banks approved over ¥200 billion of development loans on Friday. Additionally, the National People's Congress will open its annual session on March 5th, with global markets awaiting developments as over 3,000 delegates convene over two weeks to set the political agenda for the year ahead. Premier Li is expected to set a growth target of around 5% for 2024 — the same as last year — to keep China on track toward President Xi Jinping's goal of roughly doubling the economy by 2035.
Looking ahead to next week's data, we anticipate UK retail sales, services PMI from the US and across Europe, US factory orders, and Fed Chair Powell's testimony. On Wednesday, March 6th, Chancellor Jeremy Hunt will unveil the Spring Budget, teasing the possibility of introducing tax cuts as part of his plan to steer toward a lower-tax economy. Toward the end of the week, we will have the ECB's interest rate decision and Chinese trade data to monitor closely.