Market Update

It was a varied week for markets, characterized by a wealth of economic data and noteworthy remarks from government officials.
Chancellor Jeremy Hunt's Budget announcement on Wednesday elicited a muted market response as it held no surprises (refer to our commentary here). Despite a slight dip in the FTSE 100 this week, the pound saw its most robust performance since November 2023, buoyed by indications of potential interest rate cuts by the Federal Reserve in response to softer US data.
In the US, Federal Reserve Chair Jerome Powell reiterated previous statements during his address to Congress, leading to minimal market reaction. Powell discussed the potential for policy easing later in the year if the economy progresses as anticipated. He emphasized the importance of avoiding premature rate cuts, expressing confidence in achieving the 2% inflation target. Powell also signaled openness to adjusting proposed bank capital requirements and highlighted innovative liquidity rule approaches in response to the 2023 banking crisis.
Additionally, US labor market data for February revealed stronger-than-expected job creation; however, there was an unexpected uptick in the unemployment rate from 3.7% to 3.9%. Wages increased by 0.1% monthly and 4.3% annually, slightly below economist expectations, a positive signal for inflation. Powell characterized the labor market as "relatively tight" during his Capitol Hill testimony. While the data presented a mixed picture, a discernible trend is emerging that aligns with the Federal Reserve's preference for some softening in the labor market and lower wage growth to alleviate inflationary pressures.
Market sentiment, anticipating a potential US interest rate cut in June, led to pricing in of three to four rate cuts for the year. The forthcoming Consumer Price Index report is eagerly awaited to assess whether the trend of slightly hotter-than-expected inflation extended into February, following January's annual rate of 3.1%.
China reported a robust trade surplus for the first two months of 2024, with exports surging 7.1% year-on-year, surpassing the 1.9% forecast. Policymakers prefer to evaluate combined January and February data to mitigate the Lunar New Year effect on results. Subsequent data in the week revealed China's consumer prices rose by 0.7% year-on-year in February, well above forecasts of 0.3%, attributed to robust spending during the Lunar New Year holiday. Chinese equities gained traction as recent market stabilization measures by the People's Bank of China boosted investor confidence amid an uncertain economic outlook.
The European Central Bank (ECB) maintained interest rates at 4.0% as anticipated but acknowledged progress in reducing inflation. ECB President Christine Lagarde hinted at a potential rate cut in June, contingent on further data, especially regarding wages. Lagarde noted an anticipated shift in inflation to 2.0% by 2025, diverging from the previous forecast of 2026.
Looking ahead to next week, key data releases include the UK unemployment rate and wage data, as well as GDP for January and industrial production. In the US, the focus will be on CPI, PPI, and retail sales figures, along with industrial production and the University of Michigan consumer sentiment report.