On Monday there was a total solar eclipse passing over Mexico, the US and Canada. Millions of observers saw the moon temporarily steal the spotlight from the sun, and just like in markets there can be moments of darkness and uncertainty, however the sun will emerge once more.
US inflation was the standout data event this week as investors were eager to see if the recent pickup in inflation would continue. Headline inflation rose greater than the market forecast of 3.4% to 3.5% (year-on-year). Core inflation (excludes food and energy prices) remained at 3.8%. Shelter (rent) and energy have been the largest contributors to inflation and food inflation joined the party. For example, there was a 4.6% rise in the price of eggs. This is the third inflation data point of the year which shows no significant progress towards the 2% target and has led investors to question if and when US rate cuts will materialise. US government bond yields rose on the back of the higher inflation data with the yield on the 10-year US treasury bond breaching 4.5%. The pain in bond markets spilled over into other regions with UK bonds also selling off on the back of the US data.
Following the US inflation print, markets began to expect the Bank of England (BoE) to cut rates earlier and by more than the US Fed in 2024. BoE policymaker, Megan Greene, spoke this week and attempted to pour cold water on any hopes stating rate cuts remained “way off”. Inflation data in the UK will be released next week with the BoE keeping a close eye on strong services inflation, however investors are still optimistic that the UK will reach the 2% inflation target rate before the beginning of summer, which should facilitate an easing of monetary policy.
There has been positive news in the UK this Friday. For the month of February, GDP rose by 0.1% (month-on-month) in line with market expectations. The pleasing start to the year for growth almost certainly means the UK is no longer in a recession, following two quarters of negative growth at the end of 2023. UK equity markets embraced the positive news on growth; the UK large-cap index rose above 8,000, approaching all-time highs.
Gold has continued its strong performance this year and has reached a new all-time high above $2390 an ounce. Other commodities such as silver and copper have also experienced sharp rises of late. The commodity price strength has provided tailwinds to the mining sector, and we have seen strong share price performance from the sector, which lagged for much of 2023.
Inflation in China for the month of March rose by a mere 0.1% (year-on-year), coming in less than market expectations of 0.4% and cooling from the previous month’s 0.7%. Producer price deflation persisted at -2.8%, continuing an 18-month stretch of declines. The sustained weakness confirms investors worries on the effectiveness of the Bank of China’s monetary policy and the ability to raise demand.
The European Central Bank met this week and to no surprise kept interest rates firm at 4.5% for the fifth straight meeting. Despite the uncertainty of the US Federal Reserve’s next move, markets are pricing in a 25-bps cut in June. By June, the central bank will also have data points on Q1 wage growth, a key area of concern for any potential inflation spike.
In conclusion, markets have been reactive to data points, geopolitical tensions and the beginning of earning reports. Our key investment principles remain on diversification within portfolios and long-term investing in order to navigate dynamic markets and take advantage of the opportunities ahead. Our diversified approach meant we have been able to participate in the recent equity rotation into areas such as resources and financials while our dedicated physical gold holding has also performed well.
Nathan Amaning, Investment Analyst
Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.