Market Update – 7th February 2024.

7th February 2024

In the absence of significant economic data this week investors deliberated on Fed Chair Jay Powell’s recent comments over the weekend. Despite last week’s resilient US markets, which shrugged off the better-than-expected January jobs report, the latest labour market data may have dissuaded potential rate cuts in the coming months.

Powell emphasised the risk of premature rate cuts, noting that the journey to restore price stability is ongoing. Despite positive data trends over the past six months he remains cautious, wary of the mirage that these numbers could cast on the true path of inflation.

“The danger of moving too soon is that the job’s not quite done,” Powell warned, advocating patience to ensure that inflation is truly on a downward trajectory towards the Fed’s 2% target. The Fed’s long-standing commitment to data dependency and price stability often seems lost in translation, leading to a recurring disconnect between market perceptions and the Fed’s communicated policy. Those who listen closely to the Fed’s signals, rather than the market’s murmur, can take advantage of noise in markets which present buying opportunities for long-term investors.

The Chinese and Hong Kong equity markets experienced a notable rebound, boosted by China’s measures to halt the recent sell-off. The clear intention to halt the recent equity sell-off has paid dividends: Hong Kong’s Hang Seng index jumped nearly 4% in the trading session’s final hour on Tuesday. Just last week, markets were navigating five-year lows, casting a cloud over investors’ confidence. However, the latest actions, including encouraging statements from China’s Securities and regulatory commission, have turned the tide. It’s a shorter trading week in Asia with the Shanghai Stock Exchange drawing its curtains closed this Friday, February 9 2024, for Chinese New Year.

In Europe, retail sales contracted by 1.1% in December 2023, surpassing market expectations. This decline reflects the impact of inflation and increased borrowing costs on consumer demand. However, Germany’s unexpected growth in factory orders, rising by 8.9% month-on-month in December, brought positive momentum. The upsurge was propelled by large orders across the board—most notably in vehicle construction, including a staggering 110.9% boost in areas like aircraft, ships, and trains.

Looking to the UK, the FTSE 100 closed higher on Tuesday, fuelled by energy giant BP which soared nearly 6% after announcing an increase to its dividend and a $1.75bn of share buybacks during the first three months of the year. This bold move comes as a welcome surprise to investors as it shadows a considerable drop in annual profits which, while down from 2023’s highs due to the retreat in oil prices post the Ukraine crisis, still managed to surpass industry forecasts with a solid $3 billion in Q4. The decision by BP to propel its shareholder returns amid a profit slump is a testament to its resilience and forward-looking approach.

We’ve witnessed a robust performance within the UK services sector with services PMI climbing to 54.3 in January (sitting above the 50 threshold, indicating expansion). While remaining in contractionary territory the construction sector has also shown signs of resilience in January, reaching a two-year high at 48.8 with great optimism and an anticipated rise in business activity in the year ahead as recession risk wane and interest rate cuts are on the horizon.

Still to come this week we are expecting US balance of trade, and China’s inflation data & PPI.

Kate Mimnagh, Portfolio Economist