Although it has been a shaky start to the new year across markets, equities in the US and Japan have picked up where they left off in 2023. The S&P 500 closed the week at a new record high while the Nikkei 225 is up 7.5% year to date. Upside inflation surprises and officials at the Fed and ECB pushing back on aggressive pricing for policy easing have driven higher bond yields. This and a range of other geopolitical and economic factors have seen the US dollar find renewed strength.
The incoming data continues to reaffirm that the US economy remains on track for a soft landing, likely delaying the timing of Fed rate cuts amid ongoing weakness in China and Europe. China Q4 GDP data printed close to expectations at 1%q/q, 5.2%Y/Y; however, investment sentiment remains very negative. The PBOC left a key lending rate on hold this week, while there were further signs of deterioration in the property development sector. Property investment is down 9.6% through the year to December and new home prices recorded their steepest month-on-month fall (-0.4%) since 2015.
Speaking at the Brookings Institute, Fed Governor Waller indicated that the strength of the US economy did not warrant the sort of policy easing seen in previous cycles. Market expectations for significant rate cuts in 2024 were heavily influenced by comments Waller made back in November that outlined the case for the Fed to cut rates alongside falling (but still above target) inflation. Waller noted the importance of the upcoming January CPI data (out mid-February) as the report will contain potentially key revisions to the 2023 readings. Atlanta Fed President Bostic also delivered balanced remarks, saying that rate cuts could start in Q3 but earlier easing risked spurring demand and inflation pressures. Demand in the US is already robust, highlighted by a strong rise in December retail sales lifting 0.6% month-on-month (vs 0.4%) and the control group accelerating 0.8%m/m (vs 0.2%).
As much as 150bps of ECB rate cuts are priced for 2024, but officials from the central bank have been united in attempting to dampen those expectations in recent weeks. Ahead of next week's policy meeting, ECB President Lagarde spoke at the Davos forum and highlighted that while rate cuts may be forthcoming by mid-year, rate-cut pricing risked undoing some of the progress on inflation. Upsides surprises in the UK's December inflation report would not have gone unnoticed at the ECB. 12-month headline CPI in the UK lifted from 3.9% to 4% (vs 3.8% expected), though an unchanged core rate at 5.1% and firmer services inflation at 6.4% (from 6.3%) were the more significant developments. Markets took away from this that central banks will continue to encounter bumps on the road ahead to bringing inflation back to their respective targets.
In Australia, the very weak December Labour Force Survey published this week has largely been set aside, appearing to be attributable to seasonal volatility. Employment surprised all concerned falling by a net 65.1k - its largest fall since the pandemic lockdowns in 2021 - after very strong gains in October (44.2k) and November (72.6k). Despite this, the unemployment rate remained at 3.9% due to a very large fall in the participation rate to 66.8% from a record high in November (67.3%). As discussed in my review of the report, very little should be read into December's outcomes; overall, the Australian labour market remains robust with the unemployment rate below 4% and participation around record highs.
