Market Report - 13/03/2024
UK economy returns to growth; US Inflation remains stubborn
The Office for National Statistics has confirmed this morning that the UK economy grew by 0.2% in January, providing a much-needed boost following news that the UK entered a “shallow” recession.
The technical recession the UK finds itself in could well be short lived, with growth now expected to continue throughout 2024. According to Chief UK Economist at Deutsche Bank – sentiment towards the pound is forecast to improve and continue its uptrend as the Bank of England edge towards quantitative easing, possible as soon as Q2.
Today’s GDP release saw the ONS outline that services grew by 0.2% in January, making it the largest contributor to the positive data reading. Construction output also grew by 1.1% in January despite it falling by 0.9% over a three month period leading to Jan.
When breaking down the services growth, the data shows that retailers, wholesalers and health & social work activities grew by 0.6% (despite the impact of strikes, such as the junior doctors’ continued industrial action in January), whilst education services grew by 0.7%. However, legal activities, architecture and engineering, accounting, tax consultancy all declined.
The positive news this morning has been greeted with optimism across the board with a number of economists suggesting that the UK will now exit the current recession in Q1 this year, as aforementioned.
In Europe, it was announced at 10am this morning that industrial production was down by 3.2% in the euro economic area (down by 2.1% in the EU). Eurostat also announced that industrial production had decreased by 6.7% year on year in the euro economic area and 5.7% in the EU. Breaking down the data from the euro economic area, data showed a 14.5% decrease in production of capital goods while there was a 0.5% increase for energy.
The reaction to this EU data release from the markets has been relatively subdued, with most major EUR pairs seeing less than 0.1% movement off the back of it. Whilst the immediate response hasn’t sent shock waves to euro traders, the overwhelming sentiment doesn’t bode well for general sentiment in the eurozone and could halter any potential outperformance for the single currency, as we edge towards the end of this week. ECB policy maker speeches and CPI releases from Spain, France and Italy will be eyed by investors for fresh impetus on euro rates over the next 48 hours.
Lastly, in the US; yesterday saw the release of the eagerly awaited US CPI inflation data. The USD retained the majority of their overnight gains after a higher-than-expected reading of US inflation. The reading showed that inflation remained more stubborn than expected (3.2% YoY actual vs 3.1% YoY forecast), feeding into concerns that the Federal Reserve will have little impetus to begin cutting rates in the immediate term, while they still battle to bring inflation towards their 2% target.
However, markets maintained their bets that the Fed will have enough cause to begin cutting rates by June, with a 25 basis point reduction still on the cards, according to the CME Fedwatch tool – which measures forecast interest rate hikes / cuts from the main 3 central banks.
The hotter CPI reading potentially sets the stage for a stronger reading on producer price index inflation due later this week, which is the next key risk event for the USD. U.S. retail sales data for February is also due on Thursday.