Investors will this week delve into additional indicators shedding light on the inflation trajectory for major economies, amidst the backdrop of stock markets potentially heading for a fifth consecutive month of gains.
ADVERTISEMENTLast week, amid indications from major central banks hinting at the initiation of rate cuts, global stock markets, notably in Europe and the US, maintained a promising momentum which could lead them to a fifth consecutive month of gains in March. Getting ahead of its global peers, the Swiss National Bank (SNB) implemented a 25-basis point rate cut, marking the end of its tightening cycle since June 2022. Spontaneously, the US Fed and the Bank of England (BOE) both signalled they were edging toward ending their rate hike campaign later this year in response to diminishing inflationary pressures.
Eyes on Inflation: What's Next in the Week Ahead?
This week, during a shortened week due to the Easter holiday, investors will focus on several key inflation indicators from major economies, including the French and Italian Consumer Price Index (CPI), the US Personal Consumption Expenditure (PCE) Index, the Japanese Tokyo CPI, and the Australian monthly CPI. Additionally, the UK's Q4 GDP is a crucial parameter to gauge the country's economic trajectory.
The EU
European stock markets have demonstrated remarkable strength this year, with both the Euro Stoxx 50 and the DAX consistently reaching new all-time highs. This week, investors will closely monitor three key economic indicators: German employment data, along with inflation data from France and Italy for the month of March.
The challenging economic conditions in Germany have led to a rapid increase in unemployment. The number of unemployed individuals rose by 11,000 in February to reach 2.713 million, while the seasonally adjusted jobless rate remained unchanged at 5.9% for the third consecutive month, marking its highest level since May 2021. Forecasts suggest that the labour market may continue to face challenges, with consensus expectations indicating that the unemployment rate will remain at the same level in March.
In France, inflation has been on a cooling trend, largely attributed to slowdowns in the price growth of food and fresh products. The annual inflation rate eased to 3% in February, marking its lowest level since January 2022. However, there are concerns about a potential resurgence in energy prices, which could impact upcoming inflation data.
In Italy, annual inflation has shown sluggish growth since November 2023, with four consecutive months of gains below 1%. The most significant contributor to this subdued inflation has been the decrease in housing and utilities prices.
In 2023, the European economy experienced stagnation amid soaring interest rates and persistent inflationary pressures. With inflation now showing notable signs of easing, anticipation mounts for the European Central Bank (ECB) to initiate interest rate cuts starting in June this year.
The US
The ongoing AI euphoria continued to drive gains on Wall Street, with the S&P 500 posting its largest weekly gain in 2024. The Fed signalled its intention to lower the interest rate some time this year despite re-elevating inflation. The US economy appears to be experiencing a "soft landing" following the Federal Reserve's rate hikes over the past two years. This week, markets' focus will be the country's February PCE data, which is considered the Fed's favourite gauge of inflation. The headline PCE rose 2.4% year on year in January, while the core PCE, excluding food and energy, increased 2.8% annually. Both figures remained above the Fed's target of 2%. Any further rise in these indices could raise concerns about the trajectory of inflation in the country.
Additionally, this week will see the release of the final reading of the fourth-quarter GDP, providing additional insights into the country's economic trajectory. The initial two estimates placed the annual pace of growth at 3.1% and 3.2% respectively, indicating that the US economy remains in a resilient state.
The UK
The UK's benchmark average, the FTSE 100 posted a strong gain after the Bank of England (BOE) signalled rate cuts last week. However, despite this positive movement, the index continues to underperform compared to its European and US counterparts, primarily due to poor performance in mining stocks.
The country is due to release the final fourth-quarter GDP data this week after the first read showed the UK fell into a technical recession in the last two quarters of 2023. The UK's economy contracted by 0.3% at an annual rate in the fourth quarter, following a 0.1% shrinkage in the third quarter. The economic downturn may prompt the BOE to expedite rate cuts.
Japan
Japanese stock markets continued their upward trajectory, reaching a record high as the Nikkei 225 surpassed 40,000 for the first time on record last week. The Bank of Japan (BOJ) made a significant shift in its monetary policy by ending eight years of negative interest rates and lifting the Yield Curve Control (YCC). While this decision was widely anticipated, it signifies a pivot in the BOJ's approach. Japan's economy has shown resilience in the post-pandemic recovery phase, shaking off the deflationary era. Inflation began to surpass the targeted 2% level in June 2022. However, the elevated inflation may prompt the BOJ to consider further tightening of its monetary policy. Therefore, the Tokyo Core CPI data for March holds significant importance for market sentiment, as it provides clues into the BOJ's potential policy path. In February, the data rose by 2.5%, marking the highest level in four months. Another reading higher than expected could potentially limit gains in the stock market.
Australia
Last week, the ASX 200 resumed its upward trend, with both mining and banking stocks posting strong performances following the Reserve Bank of Australia's decision to hold the Official Cash Rate (OCR) steady at 4.35% for the third consecutive time. Australia's annual inflation rate stood at 3.4% in January, marking the slowest pace since November 2021. While the level remained above the 2% targeted level, Australia's labour market stayed tight in February, putting upside pressure on consumer prices. This week, market participants will closely monitor the release of the monthly CPI data for February. A further decline in inflation may bolster local stock markets, while the opposite scenario could dampen sentiment.
