Soft-landing or no-landing for the US?

The US market experienced a significant start to February, particularly with the release of the January jobs report, which surpassed expectations. The addition of 353,000 jobs indicated the strength of the US labour market, bringing about positive news for American workers and President Biden.  

However, it also raised concerns for the Federal Reserve (Fed) as they grapple with the challenge of navigating this robust economic landscape with the potential for lowering interest rates due to progress on inflation. 

The unemployment rate held steady at 3.7%, defying estimates of a slight increase to 3.8%. Additionally, average hourly earnings continued to rise, showing a 0.6% increase from December and a 4.5% increase from the previous year. Alongside this, US consumer confidence increased at the start of 2024, with optimistic expectations that inflation will continue its downward trend. 

Central Bank sentiments 

The Fed, pre-empting the labour market data release, aimed to temper market expectations of a March rate cut. Despite acknowledging the possibility of rate cuts throughout the year, they emphasised the need for confidence in sustained inflation toward the 2% target. The European Central Bank (ECB) and Bank of England (BoE) echoed a similar sentiment, aligning their tones with the Fed's cautious approach. 

Eurozone and German economic outlook 

In the Eurozone, headline inflation (which includes higher weightings to more cyclical components such as energy) slowed to 2.8% in January. However, the core inflation (which focuses on less cyclical components such as services), a key measure for the ECB, stayed high at 3.3%, slightly more than expected. The distinction is crucial as core inflation focuses on more stable elements, excluding the impact of volatile factors like food and energy prices. Concerns here are, as in the US, that the sticky nature of service inflation, linked to wages which are still running above target inflation rates. In Germany, the economic picture looks gloomy as GDP, a measure of the country's economic health, went down by 0.3% in the last quarter of the year. This affected the overall Eurozone GDP, which stayed at 0.0%, lower than the expected 0.1%. 

UK job market and wage pressures 

Shifting focus to the UK, the job market is displaying signs of cooling off, with job vacancies experiencing the most significant decline in three years in December. Early indications suggest a continuation of this trend into January, potentially marking the onset of a challenging year for job seekers. This shift might alleviate upward pressure on wages, a symptom of persistent inflationary pressures the BoE is actively addressing. 

Earnings seasons highlights 

As we move further into February, we find ourselves amidst earnings seasons. Notably, Microsoft, Meta Platforms, and Amazon have reconfirmed their market leadership positions, delivering positive surprises and continued growth. Conversely, Tesla disappointed the market for the fourth consecutive quarter. Apple and Alphabet reported positive earnings growth, though stock prices falling post earnings reflect high expectations already baked into the price for these US equity stalwarts. Looking ahead, Nvidia is set to release its Q4 2023 earnings results on 21 February, a key beneficiary of the artificial intelligence (AI) boom we have been seeing since early 2023 and the release of Chat GPT. 

In conclusion, global economic data has strengthened in the last few months. Consumer confidence has increased as real wages improve and labour markets stay tight. Shorter dated inflation measures suggest inflation is closer to central bank targets than many may appreciate. These dynamics favour exposure to risk assets, particularly stocks and bonds that can perform well in falling inflation and stable growth environments. We continue to analyse the potential future development of data and how this will impact our client portfolios. Diversification remains key, even in an improving environment. 

If you would like to discuss how these developments may impact your investment strategy, please do not hesitate to reach out. Our investment management team is here to provide support and guidance tailored to your specific needs.