Written by Ilaria Massei

Last week brought positive news for the US economy, as it was revealed that it grew at an annualised rate of 3.3%, in the final quarter of 2023. This strong performance marked the conclusion of a robust 2023, defying earlier concerns of a potential recession. This week will see the Federal Reserve (the Fed) officials making their decision on monetary policy and with super core inflation, which excludes food, energy, and housing inflation, still above the Fed’s 2% target, there seems to be room for the Fed to maintain a patient approach towards their first reduction in interest rates.

In the Eurozone, the European Central Bank (ECB) decided to keep interest rates unchanged. The central bank is adopting a cautious stance, waiting for disinflationary trends to persist before making any conclusive decisions. The ECB President Lagarde faced questions about her performance, following an ECB staff poll where more than half of the respondents viewed her leadership negatively. The coming months will be crucial for the ECB to avoid repeating past mistakes and ensuring a stable economic trajectory.

The Bank of Japan (BoJ) left its monetary policy unchanged as anticipated. Although growth and inflation projections remained subdued, Governor Ueda hinted at signs of higher wage increases, which could signal the beginning of a wage-price spiral and hopefully increased consumer spending. However, the overall sentiment was that Japan’s loose monetary policy is unlikely to be radically changed in the near term and that future changes will be slow and gradual.

In the UK, recent disruptions in the Red Sea are impacting business costs and the economic outlook. The latest Purchasing Managers’ Index (PMI), released last week, noted that supply disruptions in the Red Sea led to longer journey times, lifting factory costs. This comes at a time of already elevated price pressures in the service sector. Input prices in the manufacturing sector rose for the first time since last April, due to shipping disruptions, potentially contributing to a pickup in inflation. The UK is seen as a region where inflation could remain volatile and structurally higher, and the disruptive political backdrop adds an additional layer of risk, particularly from a government bond (gilt) perspective.

With headline economic data in China remaining weak, the People’s Bank of China declared a 25-basis points reduction in interest rates for refinancing and rediscounting loans, to provide support to the agricultural sector and small businesses. On the back of this news and in anticipation of further economic stimulus, the MSCI China Index rebounded over the last week, recovering some of the lost ground from a challenging start to 2024.


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