Market Update

Inflation concerns rattled US markets this week following the release of March's CPI data, which showed an unexpected uptick to 3.5% year-on-year, up from February's 3.2%. The core inflation rate, which excludes volatile items like food and energy, remained steady at 3.8% year-on-year, surpassing expectations of 3.7%. This unexpected rise surprised markets, pushing long-term Treasury yields higher and raising concerns about the Federal Reserve's monetary policy response.
As we have consistently emphasized, the Federal Reserve remains data-dependent. Market expectations for six rate cuts this year were overly optimistic, and while inflation is expected to moderate, recent data indicates a slowdown in this improvement, reducing the likelihood of a June rate cut. Predictions now point towards only one or two cuts later in the year. Our investment management team remains vigilant for market misinterpretations, ready to capitalize on emerging opportunities.
Thursday's release of producer price inflation data initially provided some relief, with prices rising a modest 0.2% in March, slightly below expectations and well under February's increase. However, this calm was short-lived as reports of escalating tensions between Israel and Iran drove oil prices higher, and earnings reports from major US banks underwhelmed markets. JPMorgan Chase & Co reported a 6% increase in profits, but its net interest income projection fell short of expectations. Wells Fargo beat profit forecasts but posted a drop in net interest income due to weak borrowing demand. Citigroup's earnings also disappointed. Despite this, all three banks saw increased earnings compared to the fourth quarter as investment banking and trading revenue surged. Q1 earnings will continue next week with firms such as Netflix, Goldman Sachs, and Johnson & Johnson scheduled to release reports.
In Europe, attention turned to the European Central Bank (ECB), which chose to maintain its key deposit rate at a record high of 4.0%, in line with expectations. However, the ECB hinted that it may be prepared to ease policy closer to summer, contingent upon an updated inflation assessment due later that month. ECB officials emphasized the importance of sustained inflation convergence to the target, signaling a cautious stance towards monetary policy adjustments. Notably, the ECB's stance appeared to be independent of the recent robust inflation data from the US, reaffirming the bank's commitment to a data-dependent approach.
Despite broader market retreats, the UK's FTSE 100 Index stood out by bucking the downtrend, posting a notable gain of 1.07%. The weakness of the British pound against the US dollar played a pivotal role in supporting the index, buoyed by favorable conditions for many multinational corporations with significant overseas revenue streams. The UK economy displayed signs of resilience, expanding for the second consecutive month. February saw a sequential growth of 0.1% in GDP driven by a rebound in manufacturing output. Moreover, revisions to January's GDP growth figures suggested a stronger-than-expected performance, indicating a potential exit from recessionary pressures. Over the three months leading up to February, the UK's GDP expanded by 0.2%, underscoring gradual but steady progress in economic recovery.
Looking ahead to next week's data, key releases include Eurozone industrial production and US retail sales. In China, a flurry of economic indicators including GDP, retail sales, industrial production, and the unemployment rate will be closely watched. In the UK, we can expect unemployment data along with March inflation figures and retail sales. In Japan, the focus will be on inflation data, providing insights into the country's inflationary pressures and the Bank of Japan's policy outlook.