Market Update

It was a week of mixed market performance as investors grappled with higher inflation and indications of weakening consumer spending.
Investors largely shrugged off the hotter-than-expected US CPI report earlier in the week. However, the subsequent unexpected rise in the Producer Price Index (PPI) raised greater concerns about the Federal Reserve's potential interest rate cuts this year. Producer prices surged by 0.6% month-over-month in February, exceeding the estimated 0.3% increase and marking the largest jump since August of last year.
These data points support the Fed's stance of maintaining interest rates within the 5.25-5.5% range. However, February's retail sales figures indicated waning spending momentum, particularly in the services sector. Retail sales rose by 0.6% month-over-month in February 2024, following a revised 1.1% drop in January and falling below market forecasts of a 0.8% increase. This aligns with expectations of slower consumption growth ahead, despite narratives of economic reacceleration fueled by recent inflation and jobs data. With a focus on price stability and maximum employment, the Fed is expected to keep rates unchanged at the upcoming meeting. Markets will closely watch the central bank's new dot plot, which displays interest rate projections from individual Federal Open Market Committee members, offering valuable insights into the direction of monetary policy.
In Japan, workers' union groups reported the highest average wage rises in the last 30 years, averaging 5.28%. This report spurred market bets that the Bank of Japan (BoJ) will pull interest rates out of negative territory for the first time since 2007 next week. The central bank has long pursued a goal of achieving sustainable 2% inflation, driven and supported by wage growth. However, the market may be setting itself up for disappointment as cash wage growth remains negative, and inflation has been driven higher by external pressures, remaining relatively low compared to other major economies. Japan's ultra-loose policy has weighed on the Yen, yet removing stimulus carries the risk of deflation reappearing; policymakers must be confident that wage growth and inflation are stable.
It was a positive week for China, with the Hang Seng closing up 2.25%. The People's Bank of China injected more money into the banking system through its medium-term lending facility, maintaining the lending rate at 2.5%. The State Council also announced plans to boost spending by at least 25% by 2027 to stimulate consumer and business investment, focusing on sectors like industry, agriculture, transport, education, and healthcare, aligning with Beijing's goal of achieving 5% economic growth in 2024.
UK and European stocks managed to close the week higher ahead of key inflation data and central bank interest rate decisions next week. The Bank of Japan will meet on Tuesday, followed by the Federal Reserve, which is expected to maintain rates within the 5.25-5.5% range on Wednesday. The Bank of England is also expected to hold rates at 5.25% on Thursday.
Looking ahead to next week's data releases, key figures include China's industrial production, retail sales, and unemployment rate, UK inflation data and retail sales, as well as inflation data for Europe and Japan.