Market Update – 20th March 2024.

20th March 2024

This week is packed with central bank interest rate decisions, giving markets plenty to digest.

On Monday, data revealed China’s economy started the year on a positive note, with industrial production surging by 7.0% year-on-year during January and February combined, outstripping expectations of 5%. Retail sales also outperformed, posting a 5.5% year-on-year increase over the same period, compared to the anticipated 5.2%. Despite fewer working days due to the Lunar New Year holiday, this upbeat performance indicates promising prospects for China, buoyed by supportive policy stimulus.

On Tuesday, the Bank of Japan stole the spotlight with its groundbreaking decision to end its negative interest rate regime, marking a significant shift from its aggressive monetary stimulus program. Governor Ueda announced a hike in the short-term rate from -0.1% to a range between zero and 0.1%, the first increase in 17 years. This move follows sustained inflation surpassing the bank’s 2% target for over a year, coupled with record-breaking salary increases among major companies, the highest in 30 years. Governor Ueda stressed the importance of maintaining accommodative monetary conditions, signalling no immediate tightening. As we have mentioned previously, domestic inflation has been driven by external pressures removing stimulus harbours the risk of deflation rearing its ugly head.

Meanwhile, the US Federal Reserve is set to conclude its two-day meeting later today, with expectations of no change in interest rates, maintaining the range of 5.25-5.5%. With recent inflation data coming in higher than forecasted, investors will scrutinise the FOMC economic projections for clues on future rate cuts and the number expected this year.

In the UK, headline inflation dropped to a two-and-a-half-year low in February, with prices rising by 3.4% year-on-year, down from January’s 4% and slightly below forecasts of 3.5%. The slowdown in food prices, along with decreases in soft drinks, restaurants, and hotels, contributed to this decline. The core inflation rate, excluding volatile items like food and energy, also fell below expectations at 4.5% year-on-year, down from 5.1% in January. This notable decrease in inflation signals significant progress towards the Bank of England’s 2% target, strengthening the case for potential rate cuts in the coming months. The Monetary Policy Committee is expected to maintain rates at 5.25% during its meeting tomorrow, with markets eagerly awaiting commentary from Governor Andrew Bailey for insights into the future trajectory of interest rates.

Still to come this week, Japan’s balance of trade, PMI data from the UK and across Europe. On Friday we also have UK consumer confidence and retail sales.

Kate Mimnagh, Portfolio Economist