- Higher than expected inflation dampens the mood,
- UK economy contracts,
- Oil’s rollercoaster ride far from over,
- Economic data sets the stage.
Fed’s rate-cut plans seemingly delayed
The rollercoaster ride of the United States (US) economic news continues. The latest twist involves a surprising surge in US consumer prices at the beginning of the year. This unexpected jump has put a damper on any hopes for a smooth ride to reaching target inflation of 2% and has likely kicked any US Federal Reserve (Fed) interest rate cuts further down the road.
So, what’s the deal with this sudden uptick? Well, the core inflation, which excludes the volatile costs of food and energy, decided to do its own version of a rocket launch, climbing 0.4% from December, the most significant leap we’ve seen in eight months. When compared to a year ago, it climbed 3.9% year-on-year, matching the previous month’s figures, while overshooting market expectations of a 3.7% year-on-year climb.
While economists have a preference for the core-inflation gauge, as it is a better indicator of the true inflationary trends, let us not forget about the Consumer Price Index (CPI), which climbed by 0.3% from December and 3.1% from a year ago. These figures have effectively taken the wind out of the sails of those who were hoping for an imminent interest rate cut from the Fed.
Following the release of these unexpected numbers, the stock market ended up with a bloody nose, with the S&P 500 dipping, while Treasury yields surged, as traders swiftly adjusted their expectations for Fed rate cuts. The likelihood of a rate cut in March now hangs by a thread, while any hopes for a May cut are dwindling fast.
In the aftermath of this shakeup, some policymakers – including Fed Vice Chair for Supervision, Michael Barr – are once again calling for caution and the continued monitoring of economic data before any decisions on interest rate cuts are made.
But what’s fueling this inflationary fire? Well, it’s not just one thing. It is, in fact, a whole buffet of price increases. Food, car insurance, medical care—you name it, they’ve all pitched in to contribute to over two-thirds of the overall price surge. Even outpatient hospital services and pet services decided to join the party, clocking in with their highest increases, ever, in a single month.
However, it’s not all doom and gloom. Used car prices took a bit of a dip, falling by their highest rate since 1969. Plus, broader goods prices and energy continued to slide. However, policymakers are still a bit jittery, with the concern being that the recent dip in inflation might be concentrated in too few categories.
Bearing the inflation outlook in mind, what is the bottom line in the context of rate cuts? Economists have revised their forecasts, with many now predicting the first cut will come later in 2024 as the uncertainty surrounding inflation and the timing of rate cuts continues to add complexity to an already unpredictable landscape.
Looking ahead, it’s clear that the Federal Reserve is treading carefully, especially given the limited historical experience with the current economic dynamics. While the US economy has shown resilience, there are still challenges ahead, particularly in achieving the Fed’s target inflation rate of 2%.
In the meantime, both consumers and investors will have to navigate these uncertain waters, keeping a close eye on inflation trends, economic indicators, and the Fed’s policy stance. As the saying goes, expect the unexpected.
MARKET ROUNDUP
Bulls and bears on parade
In equity markets, the tone was set by a mix of US economic resilience and global economic uncertainty. US stocks held their ground, with the S&P 500 inching up by 0.1%, the Dow Jones adding 100 points, and the Nasdaq nudging up less than 0.1%. Investors eagerly absorbed fresh economic data while awaiting cues from Fed officials on potential rate cuts. Market sentiment also fluctuated amidst a flurry of corporate earnings and additional economic data. Retail sales plummeted more than expected offsetting some of the concerns brought about by the higher-than-expected inflation reading, while jobless claims unexpectedly fell to a four-week low. Real estate, materials, and utilities emerged as top performers, while communication services and tech faced challenges.
In Europe, the Frankfurt DAX 40 index surged by 0.6%, fueled by positive corporate earnings and upbeat remarks from European Central Bank (ECB) President, Christine Lagarde. International Banking company, Commerzbank’s stellar 55% profit surge for 2023 stole the spotlight.
Meanwhile, in the United Kingdom (UK), the FTSE 100 traded 0.4% higher, buoyed by expectations of an interest rate cut by the Bank of England, (BoE) following news that the British economy is slipping into recession. Merchant banking group, Close Brothers Group, faced a significant drop following the suspension of dividends, contrasting with global information-based analytics company, RELX’s resilience, which showcased an optimistic outlook and strong growth in operating profit.
In South Africa, the Johannesburg Stock Exchange echoed global sentiment with its own unique rhythm. The local market witnessed a mixed performance, with select sectors outshining others. Mining and resource stocks experienced gains, riding the wave of global commodity prices. However, financial services faced headwinds, influenced by both domestic and international economic factors.
As the market narrative unfolds, investors remain captivated by the interplay of economic data, corporate performance, and monetary policy decisions from central banks.
Oil dives, gold gleams
In the arena of global oil prices, the stage is set for a rollercoaster ride. During the week, West Texas Intermediate Crude futures took a nosedive to around $76/barrel, before climbing to $78.07/barrel on Thursday night. Brent Crude futures fell 0.1% to $82.77/barrel during the week, but both WTI and Brent Crude contracts climbed over 1% on Thursday on the back of a larger than expected drop in US retail sales, which reignited hopes that the Fed may soon start cutting interest rates which would have a positive impact on oil demand. However, the price will continue to be put under pressure for a number of reasons. Currently, price pressures are being fueled by a staggering surge in US crude inventories, marking their highest jump in three months. The rise in US crude inventories, which surpassed market projections by a mile, ignited concerns about demand in the US, the world’s largest oil consumer. In addition, amidst geopolitical tensions and the ongoing Russia-Ukraine conflict, oil markets also remain on edge balancing fuel demand with potential supply disruptions. The Organization of the Petroleum Exporting Countries, however, is projecting a promising uptick in global oil demand over the coming years. In the meantime, volatile oil prices will remain the norm.
In the realm of precious metals, gold shimmered back towards the $2,000/ounce mark, taking advantage of the dollar losing some of its recent gains. Investors continue to try decipher the landscape in the wake of mixed economic data from the US, where disappointing retail sales clashed with unexpectedly low jobless claims. As the market saga unfolds, the spotlight remains fixed on speak from Fed officials, whose commentary could sway the tides of monetary policy.
Currency roller coaster
In the world of currencies, the US Dollar Index took a breather, dipping below 104.4 as investors scrutinised economic data and the Fed’s policy stance. Despite earlier gains, the dollar faltered following disappointing US retail sales figures for January, as they slid by 0.8%. Chicago Fed President, Austan Goolsbee, cautioned against delayed rate cuts, while Fed Vice Chair for Supervision, Michael Barr, highlighted the challenges ahead in reaching the 2% inflation target.
In the European Union, the euro held steady above $1.07/€, rebounding from recent lows, while ECB officials struck a cautious tone on monetary easing. ECB President, Christine Lagarde, stressed the need for more evidence before considering rate cuts, despite signs of inflation nearing target levels.
Meanwhile, the British pound faced downward pressure, slipping towards $1.25/£ amid concerns over the UK’s economic direction. A contraction in the UK economy during the fourth quarter of 2023 compounded uncertainties, despite some relief from slightly lower-than-expected inflation figures.
In South Africa, the rand weakened to three-week lows, to trade around R19.10/$ before gaining back some lost ground during afternoon trade on Thursday. Market attention now shifts to today’s PCE (personal consumption expenditure) data from the US, and the upcoming local budget speech, on Wednesday next week, which will set the tone for the upcoming fiscal year.
Key Indicators:
USD/ZAR: 18.94
EUR/ZAR: 20.38
GBP/ZAR: 23.83
BRENT CRUDE: $82.81
GOLD: $2,004.28
Sources: Refinitiv, Bloomberg and Trading Economics.
Written by Citadel Global Director, Bianca Botes.