U.S. Markets:

• In the wake of the January data revealing elevated headline and core PPI figures in the United States last Friday, market sentiments leaned towards heightened anticipation that the Federal Reserve might defer the initiation of interest rate cuts and scale back the magnitude of the proposed cuts. Consequently, fueled by these mounting expectations, Wall Street indices concluded the day with declines. The S&P 500 index SPX:USY dropped 0.48% to close at 5,005.57, the Nasdaq composite index CCO:USN dropped 0.82% to 15,775.65, the NYSE composite index NYA:USY dropped 0.15% to 17,409.30, and the Dow Jones Industrial Average index DJI dropped 0.37% to 38,627.99.
• The Dollar index DXY, a closely watched gauge of the U.S. dollar’s performance against other major currencies, closed last week at 104.3 marking a 0.2% weekly rise.
• The Brent crude oil closed the previous week at USD 83.5 per barrel, reflecting a weekly 1.6% rise.
• The price of gold closed last week with a 0.5% drop, settling at USD 2,013 per ounce.
• The 10-year U.S. Treasury yield completed the week with a 10 basis points increase, settling at 4.28%. The 2-year U.S. Treasury yield, particularly responsive to Federal Reserve policy rates, finished 4.64% up by 16 basis points.

European Markets:

• European stocks finished up Friday, as the Stoxx Europe 600 index SXXP gained 0.62% to 491.59. The German DAX index increased 0.42% to 17,117.44, the French CAC 40 indexadded 0.32% to 7,768.18.

Asian Markets:

• Stocks in the Asia-Pacific region mostly grew Friday, Feb 16. Hong Kong stocks increased with the Hang Seng index up 2.5% to 16,339.96, the Nikkei 225 index gained 0.86% to 38,487.24. China’s Shanghai Composite index rose 1.3% to 2,865.90.
• The S&P/ASX 200 Benchmark index in the Australian stock market rose 0.69% to 7,658.30.

Let’s take a look at the macroeconomic indicators and developments tracked in the US last week:

• January U.S. Inflation Overview

The headline CPI accelerated from 0.2% to 0.3% on a monthly basis, surpassing expectations of 0.2%. Although it marked the highest increase in the last four months, on a yearly basis, it decreased from 3.4% to 3.1%, deviating from the expected decrease to 2.9%.

• Factors Influencing Inflation Rise

The unexpected rise in the monthly CPI was driven by a substantial increase in both food prices (from 0.2% to 0.4%) and service prices (from 0.4% to 0.7%). However, the overall monthly CPI increase was constrained by declines in energy products, used vehicles, and clothing prices.

Specifically, energy prices saw a faster decline (from 0.2% to 0.9%), used vehicle prices resumed their decline (from a 0.6% increase to a 3.4% decrease), and clothing prices shifted from stability to a decrease (from 0% to 0.7%).

Upon closer examination of service prices, all categories remained above the headline inflation. Rent inflation recorded the highest increase in the last four months (from 0.4% to 0.6%), accompanied by significant acceleration in the prices of health services (from 0.5% to 0.7%) and transportation services (from 0.1% to 1%), indicating the persistence of rigidity in service inflation.

The core CPI, excluding food and energy prices, increased from 0.3% to 0.4% on a monthly basis, exceeding expectations (0.3%) and reaching the highest level in the last eight months. On a yearly basis, it remained at 3.9%, similar to the previous month, maintaining the lowest level in the last two and a half years, while expectations were for a decrease to 3.7%.

• January Producer Price Index (PPI)

The Producer Price Index (PPI) data increased by 0.3% in January following a 0.1% decrease in December, surpassing expectations of a 0.1% increase. On a yearly basis, it slightly decreased from 1% to 0.9%, while expectations were for a decrease to 0.6%.

The increase in the headline PPI above expectations was primarily driven by a notable increase in cost of services. Cost of services recorded a significant increase of 0.6% in January after a 0.1% decrease in December, marking the strongest increase since July.

However, ongoing decreases in the costs of food and energy products limited the overall PPI increase.

The core PPI, excluding food and energy products, recorded an increase of 0.5% in January after a 0.1% decrease in December, surpassing expectations of a 0.1% increase. This marked the strongest increase in the last six months. On a yearly basis, it increased from 1.7% to 2%, reaching the highest level in the last three months, while expectations were for a decrease to 1.6%.

• University of Michigan Consumer Confidence Index for February

The University of Michigan Consumer Confidence Index for February slightly increased from 79 to 79.6, remaining below market expectations of 80. The increase in consumer confidence was primarily driven by growing expectations among consumers that inflation would slow down, and strengthening conditions in the labor market would persist.

• Consumer Expectations and Economic Indicators in the U.S. for January

According to the Consumer Expectations Survey for January, published by the New York Fed, consumers’ short-term median inflation expectations for the next 12 months remained at 3%, similar to the previous month. This signifies the lowest level since January 2021. The medium-term median inflation expectations for the next 3 years decreased from 2.6% to 2.4%, marking the lowest level since March 2020. Long-term median inflation expectations for the next 5 years remained stable at 2.5%.

• S. Industrial Production and Consumer Spending

In the U.S., industrial production showed a slight decline of 0.1% in January after a flat trend in December, falling short of the expected 0.2% increase.

The New York Fed Empire State manufacturing index, indicating the trajectory of manufacturing, rose to -2.4 in February 2024 from -43.7 in January 2024. This recovery was attributed to a slowdown in the decline of new orders and an increase in shipments, bringing it closer to the zero-growth threshold.

Monthly retail sales recorded a substantial decrease of 0.8% in January after a 0.4% increase in December, surpassing the expected decrease of 0.2%. Additionally, core retail sales, excluding volatile categories, experienced a 0.4% decline in January after an 0.8% increase in December, deviating from the expected 0.2% increase. These figures indicate a slowdown in consumer spending and domestic demand.

• Weekly Initial Jobless Claims

On the period ending February 9th, the weekly initial jobless claims unexpectedly dropped to 212,000 from 220,000, reaching the lowest level in the past four weeks and continuing to stay below historical averages. The smoothed four-week moving average, designed to minimize week-to-week fluctuations, increased by 5,750 to reach 218,500 during the corresponding period. This suggests a persistent tightness in the labor market.

The focus in the U.S. will be on Wednesday’s release of the minutes from the Fed’s January FOMC meeting. Fed Chair Powell had previously mentioned that if the economy performs as expected, they believe it would be appropriate to start interest rate cuts this year. However, Powell also stated in March that they did not expect to start the interest rate cuts until sustainable progress is made towards the 2% inflation target. The markets will closely watch for new signals regarding the future direction of monetary policy in the minutes.

Additionally, on Thursday, the S&P Global Manufacturing and Services PMI data for February will be followed. The January manufacturing PMI indicated a slight acceleration in manufacturing growth, reaching 50.7 from 50.3. On the other hand, the January services PMI, revised downward to 52.5 from 52.9, signaled a mild slowdown in service sector growth.

For February, an expected decline in the manufacturing PMI to 50.2 and in the services PMI to 52 is anticipated.

On Thursday, weekly initial jobless claims, will be monitored. The recent figures have remained at historically low levels, suggesting a continued tightness in the labor market.

Furthermore, Thursday will also feature housing market data with the release of existing home sales for January.In December 2023, the seasonally adjusted annualized rate of existing-home sales in the United States declined by 1.0% compared to the previous month, reaching 3.78 million units. This marked the lowest level since August 2010, falling below the market’s expected figure of 3.82 million units.

• Germany: ZEW Current Conditions and Expectations Indices

In February, the ZEW Current Conditions Index in Germany declined from -77.3 to -81.7, surpassing expectations and reaching its lowest level since June 2020. The ZEW Expectations Index rose from 15.2 to 19.9, exceeding expectations and reaching its highest level in the past year.

• Eurozone: Fourth Quarter GDP Growth and Industrial Production

Revised data for the Eurozone’s fourth-quarter GDP growth revealed a slight contraction of 0.1% after registering 0.1% growth in the first and second quarters, followed by a mild contraction of 0.1% in the third quarter. The fourth quarter, however, displayed stagnant growth at 0%, averting a recessionary trend according to preliminary data.

Industrial production in the Eurozone witnessed a notable increase of 2.6% in December, defying expectations of a slight decline following a 0.4% increase in November. On an annual basis, a 5.4% decrease in November reversed, recording a 1.2% increase in December, thereby concluding a ten-month period of decline.

• January CPI Figures in the United Kingdom

In the United Kingdom, January’s Consumer Price Index (CPI) exhibited a 0.6% decrease on a monthly basis, following a 0.4% increase in December. The yearly CPI remained steady at 4%, in line with expectations, while the core CPI experienced a sharp decline of 0.9% on a monthly basis, marking the most significant drop in the past year. On an annual basis, the core CPI maintained a level of 5.1%, the lowest since January 2022, with expectations leaning towards a slight increase to 5.2%.

• Fourth Quarter GDP and Economic Contraction in the United Kingdom

The United Kingdom experienced a 0.1% contraction in the third quarter, followed by a more significant 0.3% contraction in the fourth quarter, surpassing expectations of a 0.1% decline. As a result, the UK officially entered a recession.

• ECB January Meeting and Economic Outlook

Thursday will focus on the European Central Bank’s (ECB) minutes from the January meeting. The ECB had maintained interest rates in line with expectations, with indications that interest rate cuts were still distant. The ECB emphasized that keeping interest rates at current levels for an extended period would contribute significantly to controlling consumer price inflation. The ECB President, Lagarde, highlighted potential inflation challenges due to geopolitical tensions, indicating a cautious approach to further interest rate cuts.

• Eurozone PMI Data and Consumer Confidence

Thursday will also see the release of preliminary Purchasing Managers’ Index (PMI) data for manufacturing and services sectors in the Eurozone.

The January manufacturing PMIs had shown contraction in the Eurozone, reflecting the impact of tightening financial conditions and weakening demand following ECB interest rate hikes.

Across the region, service PMIs in January continued their contractionary trends below the 50 thresholds, indicating contraction zones. Specifically, service PMIs in Germany were revised upwards from 47.6 to 47.7, and in France from 45 to 45.4, suggesting a slight deceleration in the contraction pace in the service sectors.

Meanwhile, in the Eurozone, the service PMI remained at 48.4, consistent with the preliminary data, indicating a sustained contraction pace.

In contrast, in the United Kingdom, the service PMI increased from 53.8 to 54.3, signaling a mild acceleration in growth within the service sector.

• Eurozone January Final CPI Data

Thursday’s economic calendar includes the release of January’s final Consumer Price Index (CPI) data for the Eurozone. In January, the headline CPI displayed a 0.4% decrease after a 0.2% increase in December, aligning with expectations. On an annual basis, the CPI declined from 2.9% to 2.8%. Core CPI, reflecting a 0.9% decrease in January following a 0.5% increase in December, recorded a yearly decrease from 3.4% to 3.3%, maintaining its lowest levels since March 2022.

• Germany: Fourth Quarter GDP and IFO Business Climate Index

Closing the week, Germany will release the final GDP growth data for the fourth quarter of the previous year. The preliminary data for the fourth quarter, indicating a 0.3% contraction, closely avoided a recession. Notably, the revision of the third-quarter growth from a 0.1% contraction to 0% prevented Germany’s economy from narrowly entering a recession.

Furthermore, the IFO Business Climate Index for February will be released, with the January index having dropped from 86.3 to 85.2. This decline was attributed to the Current Conditions Index falling from 88.5 to 87 and the Expectations Index decreasing from 84.2 to 83.5, marking the lowest levels in the past four months.

• Russia and Japan Central Bank Decisions; China and South Korea Meetings

The Central Bank of Russia kept its policy interest rate steady at 16%, aligning with expectations. The central bank signaled a decline in inflationary pressures, citing a December annualized monthly rate of 6.6%, down from late 2023 averages of 11.5%. Despite expecting year-end inflation below 4.5%, policymakers acknowledge lingering upside risks.

• Japan’s Q4 2023 GDP Growth Figures

Despite positive growth in the first two quarters (1.2% and 0.9% respectively), the economy contracted by 0.8% in Q3. Contrary to expectations of modest growth in Q4, unexpected contraction of 0.1% occurred due to weakened private consumption and investment spending, pushing the country into a recession.

The Japanese economy also recorded an unexpected annualized contraction of 0.4% in the fourth quarter of 2023, falling short of market expectations of a 1.4% expansion. This follows a 3.3% decline in the previous period, marking the first recession in five years. The challenging factors include persistent inflation and an uncertain global economic outlook.

• China’s Central Bank Meeting

On February 18th, the People’s Bank of China (PBOC) maintained the rate of one-year policy loans (MLF) at 2.5%, totaling CNY 500 billion, as part of efforts to curb pressure on the yuan and evaluate the impact of recent economic support measures. The operation, addressing expiring CNY 499 billion MLF loans in February, resulted in a minimal CNY 1 billion net injection into the system, the smallest since August. The PBOC aims to sustain “reasonably ample” banking system liquidity, especially post the Lunar New Year holiday.

Since June 2023, policymakers have supported the local currency with daily reference rate adjustments, limiting onshore yuan fluctuations to 2% on either side. In January, they implemented the largest reserve requirement ratio cut for commercial banks in two years, a 50bps reduction effective from early February.

The Bank of Korea’s meeting on Thursday will be tracked. In the previous month, the bank, meeting expectations, held the policy interest rate at 3.50% for the eighth consecutive time.

The Bank is anticipated to maintain the policy interest rate at the current level in this week’s meeting.

Other economic indicators to follow in the region include China’s Loan Prime Rates and House price indices, Indonesia’s interest rate decision and India’s Flash PMI figures.