Written by Ashwin Gurung.

Last week, the official data showed that at the end of last year both the UK and Japan economies fell into a technical recession. This was an outcome neither of the nations anticipated, marked by two straight quarters of negative economic growth. The US economy was also taken aback by hotter-than-expected inflation numbers.

The UK economy contracted once again in Q4 2023 by -0.3%, more than the market consensus of -0.1%, following a contraction of -0.1% in Q3 2023. The officials reported that in Q4, all major parts of the economy declined, with manufacturing, construction, and services having the greatest negative effect on growth. This is the first time the UK entered a recession since COVID-19 plummeted the economy in 2020. Meanwhile, the inflation rate remained unchanged, with the Core Consumer Price Index (CPI) holding steady at +5.1%, but below expectations, which renewed the hope that the Bank of England (BoE) will cut rates sooner. However, the BoE Governor, Andrew Bailey, played down the GDP data before its release and said that the BoE is seeing signs of an “upturn” in the economy and the fall in the GDP looked “very shallow”. The Retail sales numbers released on Friday appear to have validated his statements, which rebounded +3.4% month-over-month, after a sharp fall of -3.3% in December.

Similarly, in Japan, the economy unexpectedly contracted -0.1% in Q4 of 2023, coming in below consensus of +0.3% growth, causing the economy to fall into recession for the first time in five years, as domestic demand declined. Consequently, Japan lost its position as the third-largest economy to Germany. While the weakening Yen coupled with a positive corporate earnings release supported the Japanese equity market last week, the Bank of Japan (BoJ) now faces challenges in supporting the economic growth as well as the currency.

Meanwhile, in the US, the unexpected rise in inflation dampened investor sentiment and briefly drove the US market lower. Core inflation, which excludes volatile items like food and energy, rose +0.4% for the month, contributing to a year-on-year increase of +3.9%, well above the Federal Reserve’s (the Fed) target of 2.0%. A significant factor driving this inflation was the rise in housing and rent prices over the past year, increasing by +6.0%. These items account for nearly one-third of the overall CPI basket. However, it is important to note that these factors are considered very lagging data points and do not represent the current conditions. Nonetheless, US stocks rebounded over the week.

This week, the investors will be looking forward to the Fed’s latest minutes on any new insights on the direction of the monetary policy. Additionally, an eagerly awaited earnings report from Nvidia is set to be released on Wednesday, which could have a potential impact on the market sentiment, given that much of the recent rally in the US equities has been fuelled by optimism surrounding Artificial Intelligence (AI).

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