Stellar results from tech giant Nvidia had by far the biggest impact on broad market sentiment this week. Various equity indices across the US, Europe and Japan went into the weekend sitting at record highs, unperturbed by what has been a notable climb in Treasury yields since the start of the year as Fed rate cut expectations have been wound back. This suggest that equities have been content to push higher on the basis that higher bond yields are reflecting an expectation for improving economic conditions.
There was little reaction to the minutes of the RBA's February meeting. The main themes in the minutes had largely already been communicated via the Statement on Monetary Policy and at various public appearances post the meeting. That said, more nuance was introduced to the reasoning behind the Board's decision to leave rates on hold. In December, the Board said that limited data releases allowed it to pause tightening and watch developments over its summer break. On this occasion, the Board concluded that maintaining the cash rate at 4.35% would "best balance" making progress towards its inflation and full employment objectives. This was on the basis that the data received through the early part of the year had given the Board "more confidence that inflation would return to target within a reasonable timeframe while allowing employment to continue to grow". In response, the Board softened its tightening bias, though it continues to highlight upside risks to the inflation outlook from services prices.
Elevated services inflation is partly a function of rising labour costs. This made for a closely watched update of the Wage Price Index (WPI) for the December quarter. Wages growth lifted in line with expectations rising by 0.9% in the quarter, firming the annual pace from 4.1% to 4.2% (full review here). Annual wages growth is running near to a 15-year high but there were signs that the peak is nearing. Tightness in the labour market eased over the back half of 2023 and wages growth in the parts of the labour market that are most responsive to conditions appears to be reflecting this. Notably, private sector wages growth eased from 4.3% to 4.2% and the public sector - after lagging all the way through the cycle - accelerated from 3.5% to 4.3% as new enterprise agreements came into effect.
In the US, the minutes of the FOMC's January meeting and various appearances from Fed officials during the week conveyed the message that there is no rush to cut rates. The minutes noted that "most participants" were alert to the risks associated with easing monetary policy prematurely; however, "a couple of participants" had pointed to the damage that could be done by maintaining restrictive settings for too long. The FOMC has been consistent in its messaging that it needs to gain "greater confidence" that the decline in inflation is durable and that it is on track to return to 2%. In holding this line, the market has had to come towards the Fed, with the number of rate cuts priced for 2024 declining from as many as 7 to the 3-4 currently anticipated.
While Q4 GDP data was weak in both the UK and euro area, February's flash PMI readings painted a more constructive picture of growth in early 2024. The UK PMI strengthened from 52.9 in January to 53.3 in February, indicating an acceleration in activity. Optimism around the UK was also helped by comments from BoE Governor Bailey to the Treasury Committee that rates could start to be cut before inflation had been brought back to the 2% target. In the euro area, February's PMI improved to 48.9 from 47.9. While this remains in a contractionary range below 50, this reading suggests there had been an easing in the pace of decline in activity. Meanwhile, the ECB reported that negotiated wages slowed to a 4.5% year-on-year increase in Q4 from 4.7% in Q3. While this will offer the ECB some assurance that wage pressures are easing, the account of the January meeting noted that, assuming productivity growth of 0.5-1%, wages growth of around 3% would be consistent with its 2% inflation target.
