Multi-Asset Global Commentary

Positive sentiment continued in February, with most equity markets continuing to make gains. The US economy showed strength and there were also improvements in economic activity in Europe. Even China provided reasonable gains, on the expectation of further stimulus to support the economy and encourage consumer spending. The overall view is that economies are remaining resilient, and whilst there may be some signs of slowing, they are gliding towards a ‘soft landing’. This is a scenario where growth slows, but remains positive, and inflation continues to fall without a sharp drop in economic activity.

However, central banks remain cautious because of this perceived resilience. They want to ensure that inflation will not make a resurgence if they cut interest rates too soon. It is now expected that the European Central Bank (ECB) or Bank of England (BoE) may cut before the Federal Reserve (Fed), despite the Fed usually leading interest rate cutting cycles. Markets now expect cuts to begin in June. However, investors’ forecasts for these cuts have, so far, been too early.

UK

Sticky wage growth may make the MPC cautious about rate cuts

Growth data released by the Office for National Statistics (ONS) indicated a technical recession in the second half of 2023, with a 0.3% decline in GDP in the fourth quarter (following a 0.1% decline in the third quarter). However, caution is advised because the ONS has a history of positive revisions to economic data.

After the data release, the February consumer confidence survey indicated a slight (two-point) decline from a two-year peak, possibly influenced by media coverage about the recession. Nevertheless, several leading indicators point towards economic growth, including the February composite purchasing managers’ index (PMI), which reached a nine-month high at 53.3. In addition, the housing market has shown improvement, with monthly mortgage approvals surpassing 55,000 compared to the 40,000 recorded at the beginning of 2023.

While January CPI inflation held steady at 4.0%, the influence of base effects, declining food price inflation and reduced energy costs are anticipated to guide the inflation reading closer to the BoE’s 2% target in the months ahead. However, despite easing inflation, wage growth has remained sticky, suggesting the Monetary Policy Committee (MPC) may exercise caution in determining when to implement the first rate cut.

US

No rate cuts... yet

Markets had expected an interest rate cut by the Fed in March. This now seems highly unlikely and markets expect the first cut may be in June or July. The economy remains resilient – more jobs were added in January than expected and the headline CPI inflation rate fell to 3.1% for the 12 months to January, down from 3.4% in December. Company earnings season is underway and five of the ‘Magnificent Seven’ companies reported earnings that met or exceeded expectations.

A particular highlight was Nvidia, with positive sentiment around the company’s earnings helping power the S&P 500 to new highs in February.

Europe

Inflation falling, what next?

February saw core inflation (excluding food and energy) fall for the seventh month in a row as it dropped to 3.1%. Minutes released from the ECB meeting in January suggest that despite inflation falling, the bank believes ‘continuity, caution and patience’ are still needed, as rapid wage growth and underlying price pressures remain a concern. Meanwhile, unemployment fell to 6.4% in January, which is the lowest figure on record.

Japan

Party like it’s 1989

Japanese equity indices hit their highest-ever levels in recent weeks, surpassing the prior peak dating back to 31st December 1989. A weak yen has helped exporters and positive company earnings momentum has continued to provide a tailwind for the Japanese market. Further corporate governance reforms are expected from the Tokyo Stock Exchange alongside the Shunto wage negotiations. Meanwhile, the Bank of Japan is expected to begin to act to tighten monetary policy.

Asia and Emerging Markets

Is China turning a corner?

The MSCI Emerging Markets and MSCI Asia Pacific ex-Japan indices returned 4.76% and 4.50% respectively in February. Chinese equities enjoyed a particularly strong month, with the MSCI China benchmark returning 8.39%. This was mostly on the back of increased activity after the Chinese New Year, which saw markets closed for a week. Beijing also introduced new stimulus measures, including the injection of 500 billion renminbi into the banking system to improve liquidity. In addition, the five-year loan prime rate (used as a benchmark for mortgage rates) was reduced by more than expected to 3.95%. This was the largest cut since it was introduced in 2019. While most emerging market central banks kept rates on hold, Hungary and the Czech Republic announced rate cuts.

Fixed Income

Patience is a virtue

Following January’s month-end optimism about the probability of rate cuts, February saw a complete about-face. This came as the hotly anticipated US non-farm payroll data opened the month with a massive upside surprise, adding to fears of higher inflation re-emerging. Yields then moved higher as investors were faced with a robust US economy, buoyed by hotter-than expected consumer and producer inflation data. In addition, central bankers called for patience, as they pushed back hard on expectations about rate cuts. This caused investors to price out any chance of a Fed rate cut in March. And they began to doubt both the timing and magnitude of rate cuts later in the year, ultimately falling in line with central bank forecasts. Elsewhere, economies were showing signs of divergence. Eurozone countries posted mixed PMI data, with countries such as Germany showing weak growth. In the UK, the picture was also mixed, with the Bank of England taking a tough stance on the timing of rate cuts. The data pulled in both directions, with the growth outlook weak, whilst inflation remained hot. Yields retraced into the month end as US PMI data came in weaker than expected and the Fed’s preferred measure of inflation fell in line with expectations. Meanwhile, in Europe the ECB looked more open to rate cuts, adding to the debate about where and when the first rate cuts will come.

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