January was an eventful month for markets and the economy - major US and European stock indices rose while emerging market equities continued their decline, and global bond returns were negative. The Federal Reserve’s commentary was more hawkish than expected at its January meeting and recent US economic indicators revealed robust resilience.
Global financial markets entered the year on the defensive with a risk-off tone. Heightened geopolitical risks and more hawkish central banks instilled caution among market participants.
The release of strong US economic data in January alleviated fears of a hard landing, prompting a market rally in the latter part of the month. The S&P 500 finished January up 1.7%.
Unlike stocks, global bonds returns were negative. Global bonds ended January down 1.4%, as major central banks signaled they may not begin cutting rates as early as markets had expected.
The heads of the Federal Reserve, European Central Bank, and Bank of England indicated they’ve ended their interest rate hiking cycles but need greater confidence that inflation is on a sustainable path towards 2% before they begin cutting rates.
US economic data released in January came in stronger than expected, especially in the second half of the month. Strong retail sales growth, improving consumer sentiment, and above-trend 2023 Q4 GDP growth all point to a resilient economy.
The December headline and core CPI both registered a 0.3% month-on-month rise, meaning annual growth stood at 3.4% and 3.9% respectively. Latest CPI data for January released on February 13th also came in ahead of expectations with the core year-on-year rate unchanged at 3.9%.
The Fed concluded their January meeting keeping interest rates unchanged, but Fed Chair Powell all but ruled out a first rate cut at the March meeting.
In this light, ISG continue to expect four 25-basis-point Federal Reserve rate cuts this year but have pushed back their expectation for the first rate cut to May from March previously.
Inflation remains top of mind, and ISG is continuing to monitor incoming data, paying close attention to the jobs market. Wages continue to grow faster than 3.5%—the rate of wage growth which is likely to be consistent with the Federal Reserve’s 2% inflation target over the long run.
More persistent wage pressures could lead to stickier services inflation and prompt central banks to further delay rate cuts.
ISG is also keeping an eye on geopolitical developments and the risk they hold for global commodity prices and transportation costs. Shipping costs have increased sharply since the beginning of the year due to attacks in the Red Sea.
As a result, there are concerns around whether this alters the expectation that core goods inflation will remain mildly negative. At this stage it does not. Goldman Sachs Global Investment Research estimate that higher shipping costs will add no more than 0.1% to global core inflation.
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