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Weekly Market Update · 03.19.24
U.S. Bonds Fall on Hot Inflation, Multiple Central Banks to Meet this Week
Energy prices drove U.S. inflation higher in February. Central banks in Japan, the U.K. and the U.S. are scheduled to meet this week.
- Markets & Economy
- Economic Insights & Trends
- Federal Reserve
- Market Views
Key Points
What it is
We review how key events from last week affected markets and highlight what could impact markets this week.
Why it matters
Inflation likely will play a key role in central banks’ decisions on interest rates, which may impact investment returns.
Where it's going
Japan’s central bank may increase its rate to end its negative rate policy while the U.S. and U.K. banks are unlikely to make moves.
Last Week Review
U.S. investment-grade bonds lost 1.2% as Treasury yields rose more than 0.2% across maturities after U.S. inflation was stronger than expected. Global equities fell 0.4%, with stocks declining in the U.S., emerging markets and developed markets outside the U.S.
U.S. February Inflation Tops Expectations
Energy prices helped push up the Consumer Price Index in February to 3.2% year-over-year, slightly higher than economists’ expectations, from 3.1% in January. Core inflation, which excludes more volatile energy and food prices, slid to 3.8% in February, versus expectations of 3.7%, from 3.9% in January. Shelter inflation remained elevated at 5.8%, but it eased sequentially and current rent indicators point to potentially lower shelter prices. Excluding shelter, core inflation was 2.2%.
Investors See Lower Chance of First Fed Rate Cut in June
Market expectations for the first in June declined last week to a probability of 52% from 67%, based on the . Rate cut expectations have lightened through the year because of bumpy inflation and economic resilience. Nonetheless, three rate cuts are still priced in for this year as inflation generally has softened and economic growth shows signs of cooling.
Japanese Labor Unions Request Sizable Wage Hike
Japanese labor unions asked for a 5.3% wage hike during annual labor negotiations. Historically, actual hikes tend to fall about 1% below initial requests. Still, the initial results point to higher wage hikes versus last year and are a positive signal for broader wage growth in Japan. Bank of Japan Governor Kazuo Ueda referred to the wage request as a major event. Fourth quarter real gross domestic product for Japan was revised to 0.4% from -0.4%, annualized, helping the country steer clear of a recession. Altogether, we believe there is more confidence that Japan can achieve sustained 2% inflation. The Bank of Japan meets this week and markets have priced 55% odds that it exits .
This Week Review
Central Banks in Japan, England and U.S. to Meet
The Bank of Japan is scheduled to meet on Tuesday. Investors will be watching for the potential end to Japan’s negative interest rate regime. The Federal Reserve is scheduled to announce its policy decisions on Wednesday and the Bank of England is set to do so on Thursday. Neither is expected to make major changes, but the Fed is scheduled to release its updated economic projections. Since the last release, economic activity and inflation have shown resilience. We expect investors to monitor Fed comments related to future rate cuts.
U.S. Purchasing Managers Indicator Expected to Reflect Growth
Global flash data are scheduled for release throughout the week. U.S. indicators are expected to underscore ongoing economic strength with both the services and manufacturing. European data are expected to be weaker, with the manufacturing the main source of drag and services relatively stronger.
Investors Likely on Watch for Global Inflation Risks
After upside surprises in U.S. inflation last week, investors will likely pay close attention to inflationary trends elsewhere for indications of any global price pressures. Consumer Price Index inflation is scheduled to be reported in Europe on Monday, the U.K. on Wednesday, and Japan on Thursday.
Source: Bloomberg for data, news developments and schedule of economic releases. Data as of March 18, 2023.
Main Point
Bumpy Inflation
After upside surprises in U.S. inflation last week, investors will likely pay close attention to inflationary trends elsewhere for indications of any global price pressures. Higher wages may drive up inflation in Japan, and the Bank of Japan may raise its policy to rate to end its negative interest rate policy.
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