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Introduction
Global equity markets rose in March, with gains across both developed and emerging markets. Investor sentiment was supported by positive economic data, notably in the UK and Europe, and continued expectations of interest rate cuts this year. Fixed income markets also rose amid the optimism over rate reductions.
Economic Overview
UK
Bank of England and Interest Rates
As widely expected, the Bank of England (BoE) left its interest rate unchanged at 5.25%, but suggested the economy was moving towards the point when it could begin cutting rates. The Monetary Policy Committee (MPC) voted 8-1 to keep the interest rate unchanged, with the outlier preferring a 0.25% cut, though this meant the two officials who had previously called for an increase had changed their view. It was also the first time since September 2021 that none of the MPC had voted for an increase. The BoE Governor Andrew Bailey said there had been “further encouraging signs that inflation is coming down”, with expectations being for inflation to fall slightly below the 2% target in the second quarter. However, Mr Bailey also stated that the central bank needed more certainty that price pressures were fully under control. Mr Bailey reiterated that “We’re not yet at the point where we can cut interest rates, but things are moving in the right direction”. There was a further indication of a change in the BoE’s stance when the central bank said monetary policy could remain restrictive even if rates were cut. However, the BoE also said indicators of the persistence of inflation remained elevated, notably services price inflation, whilst also highlighting a still relatively tight labour market by historical standards.
Economic Growth
The Office for National Statistics (ONS) said Britain’s economy returned to growth in January having entered a technical recession in the second half of last year. In line with expectations, the ONS said the economy grew 0.2% in January having declined 0.1% in December. The service sector rose 0.2% and was the biggest contributor to overall growth, helped by strong performance on the High Street and spending in supermarkets. Construction jumped 1.1%, the biggest monthly increase since June 2023, led by house builders having a good start to the year. However, these areas of growth were partially offset by falls in TV and film production, legal services and the pharmaceutical industry, which can be quite volatile. Despite the more positive start to the year, it is too early to know for certain if the economy is no longer in recession. The data also showed the economy was 0.3% smaller than a year earlier, whilst it contracted 0.1% in the three months to January.
The ONS separately confirmed Britain’s economy did fall into a shallow technical recession in the second half of last year. The preliminary estimate of a 0.3% contraction in the fourth quarter of 2023 was left unchanged and followed a 0.1% decline in the third quarter. Household consumption declined by 0.1%, although this was an improvement on the previous quarter, whilst there was a negative contribution from net trade as exports fell by more than imports. However, fixed investment rebounded from two consecutive declines as it rose 0.9%, whilst government spending was slightly higher. On a year-on-year basis, the economy contracted by 0.2%, also unchanged from the preliminary estimate. In addition, Britain remains one of the slowest countries to recover from the impact of the pandemic, with the economy at the end of last year only 1% larger than late-2019, with only Germany faring worse among the Group of Seven nations. The economy grew 0.1% in the calendar year 2023, the weakest performance since 2009 when excluding the pandemic-impacted 2020.
Unemployment & Labour Market Statistics
The ONS said unemployment in the three months to January was unexpectedly higher, although it should be noted the statistics office is continuing to overhaul the survey. The unemployment rate rose from 3.8% to 3.9%, reversing the decline in the final quarter of last year when it fell to an 11-month low. The ONS also said that there was more uncertainty than usual regarding the unemployment rate, equivalent to around 0.1% in either direction, due to a problem with analysing data from Northern Ireland. The estimated number of job vacancies in the three months to February fell by 43,000 to 908,000, the 20th consecutive decline. The ONS also suggested more than a fifth of working-age adults are deemed to be not actively looking for work, with long-term illness cited as the main reason for around a third of this population.
The pace of wage growth slowed by slightly more than expected, but remained strong and also rose in real terms due to falling inflation. In the three months to January, annual growth in regular pay excluding bonuses fell from 6.2% to 6.1% compared with the forecasted 6.2% reading. When adjusted for inflation, annual regular pay growth was 2%. Annual growth in employee’s total pay, which includes bonuses and can be volatile, slowed from 5.8% to 5.6%, which was also a bigger fall than expected, whilst in real terms there was an increase of 1.4%.
Inflation
The headline annual rate of UK inflation, as measured by the Consumer Price Index (CPI), fell by more than expected in February. The ONS said CPI fell from 4% in January to 3.4% in February, the lowest rate since September 2021 and below the forecasted smaller decline to 3.5%. The ONS said the fall in CPI was driven by slowing food price inflation, although prices are still rising, just not as quickly as previously. Eating out costs also saw a big slowdown, whilst the pace of increase also eased for alcohol and tobacco, clothing and footwear. However, the cost of motor fuels fell at a slower pace and was the main upward contributor.
Core inflation, which excludes food, energy, alcohol and tobacco prices, fell from 5.1% in January to 4.5% in February, slightly lower than the forecasted fall to 4.6%. Service price inflation, which the Bank of England views as a key measure of domestically-generated inflation, dropped from 6.5% to 6.1%, in line with the central bank’s expectations.
US
Federal Reserve and Interest Rates
As widely expected, the Federal Reserve (Fed) left its interest rate unchanged in the 5.25% to 5.5% range. The new policy statement described inflation as remaining “elevated”, but the Fed Chair Jerome Powell said the recent higher inflation readings had not changed the underlying “story” of slowly easing US price pressures. Mr Powell did add that the data had not bolstered the central bank’s confidence in the inflation battle having been won. The decision on when to cut interest rates will depend on further data, to determine whether the recent stickier inflation data continues. Mr Powell also said “We want to be careful”, reiterating a gradual approach to rate cuts that has been reinforced by the ongoing strength in the economy which has meant there is no rush to loosen monetary policy. In addition, Fed officials affirmed their view of three cuts of 0.25% this year, whilst also upgrading their outlook for economic growth as well as slightly slower progress on reducing inflation over the course of 2024. The updated projections also showed the median policymaker expects the interest rate to fall by 0.75% in 2025, less than the 1% projected in December.
Economic Growth
In its third estimate, the Commerce Department revised up its previously reported pace of economic growth in the fourth quarter of last year from an annualised 3.2% to 3.4%, amid strong consumer spending and business investment. Economic growth had been forecasted to remain unchanged. The upward revision reflected upgrades to consumer spending, which was driven by higher services spending, business investment and state and local government consumption. The upgrades offset downward adjustments to inventory accumulation and exports.
Inflation
US consumer prices recorded a solid rise in February, amid higher costs for gasoline and shelter. The Labor Department said the Consumer Price Index (CPI) rose 0.4% in February, ahead of the 0.3% increase in January but in line with forecasts. Gasoline prices rebounded 3.8%, having fallen 3.3% in January, whilst shelter, which includes rents, rose 0.4%. Gasoline and shelter contributed over 60% to the monthly increase in CPI. Food prices were unchanged, having risen 0.4% in the previous month, with decreases in the costs of dairy products, fruits and vegetables as well as non-alcoholic beverages. However, these falls were offset by an increase in the cost of cereals and bakery products, as well as slightly more expensive meat, fish and egg prices. For the 12 months through February, CPI rose 3.2%, above January’s 3.1% increase and the forecasted 3.1% gain.
The so-called core CPI, which excludes volatile food and energy components, rose 0.4% in February, matching January’s increase. Shelter was also the main driver of the increase in core CPI, with rents rising 0.5% having increased 0.4% in January. Owners’ equivalent rent, which is what a homeowner would receive from renting a home, increased 0.4% having jumped 0.6% in January, calming concerns over a divergence with the rent measure. The cost of healthcare was unchanged, having jumped 0.5% in the previous month. Hospital services prices fell, but there was an increase in dental services costs. Airline fares surged 3.6%, whilst motor vehicle insurance was more expensive. Services excluding energy rose 0.5%, a slower pace than the 0.7% increase in January. Excluding shelter, services inflation fell from 0.8% to 0.5%. Goods prices rebounded 0.4%, having fallen 0.3% in the previous month, driven by increases in the prices of apparel. There was also a 0.5% increase in the cost of used cars and trucks. Core goods prices rose 0.1%, the first increase since May 2023 and follows a 0.3% fall in the previous month. For the 12 months through February, core CPI rose 3.8%, the smallest increase since May 2021 and follows a 3.9% advance in January.
Europe
European Central Bank and Interest Rates
As expected, the European Central Bank (ECB) kept its interest rate at its record high of 4%, whilst laying the ground for rate cuts later this year amid falling inflation. The ECB President Christine Lagarde said “We did not discuss cuts for this meeting, but we are just beginning to discuss the dialling back of our restrictive stance”. Ms Lagarde also strongly hinted that rate cut discussions were more likely at the June meeting, as wage growth data for the first quarter will have been released by then. Ms Lagarde noted that inflation, including almost all underlying measures, has been falling towards the 2% target and is now expected to be lower over the next two years than projected a few months ago. The ECB’s new quarterly projections showed inflation of 2.3% this year, lower than the previous 2.7% forecast, and then falling to 1.9% in summer 2025 before staying there until the end of 2026. Nonetheless, Ms Lagarde remained cautious, stating more evidence was needed before the ECB had sufficient confidence to cut interest rates. In addition, the ECB also lowered its projection for economic growth from 0.8% to 0.6%, with the risks tilted to the downside.
Economic Growth
Eurostat confirmed economic growth in the Eurozone stagnated in the fourth quarter of last year, which followed a 0.1% contraction in the third quarter. Net exports reduced GDP by 0.3% as exports remained flat, but imports rose 0.6%. Inventory changes provided a negative contribution of 0.1%. Household consumption rose by a nominal 0.1%, having risen by 0.3% in the previous period. However, fixed investment rose following a flat period, whilst public spending saw further expansion. On a year-on-year basis, economic growth was confirmed at 0.1%, matching the revised pace in the previous period.
Inflation
In line with its flash estimate, Eurostat said inflation in the Eurozone fell from 2.8% year-on-year in January to 2.6% in February, slightly above the forecasted decline to 2.5%. There was a further decline in energy prices, albeit at a slower pace than in January, whilst the pace of increase moderated for food, alcohol & tobacco and non-energy industrial goods. Both the flash and final estimates also showed core inflation, which excludes prices for energy, food, alcohol and tobacco, fell from 3.3% to 3.1%, the lowest level since March 2022 but above the forecasted drop to 2.9%. Services price inflation was unchanged at 4%.
Asia and Emerging Markets
Japan
The Bank of Japan (BOJ) ended eight years of negative interest rates as it announced its first interest rate rise in 17 years. As widely expected, the BOJ raised its interest rate from -0.1% to around 0% to 0.1%, although the decision wasn’t unanimous, with two of the nine board members voting against the increase. In addition, the BOJ ended its yield curve control policy for 10-year government bonds as well as other areas of its unorthodox monetary policy. However, the BOJ will keep buying “broadly the same amount” of government bonds as before and increase purchases if yields rise rapidly. The BOJ Governor Kazuo Ueda said “We reverted to a normal monetary policy targeting short-term interest rates, as with other central banks”, adding that “we will choose the appropriate level of short-term rates in line with our economic and price outlook”. The decision to end negative interest rates and other policy measures was driven by the BOJ’s judgement that the sustainable, stable achievement of the price target had come into sight. Whilst the period of negative interest rates has ended, the BOJ hinted that further rate rises will only be moderate, stating that it expects “accommodative financial conditions will be maintained for the time being”.
Japan’s economic growth for the fourth quarter of last year was revised higher from the preliminary estimate of an annualised decline of 0.4% to 0.4% growth, meaning the economy avoided falling into a technical recession. However, this was below the forecasted upward revision to 1.1%. The revision was driven by an upgrade to capital expenditure from a 0.1% decrease to a 2% quarter-on-quarter rise, although below the median forecast of 2.5%. Private consumption, which makes up around 60% of Japan’s economy, fell 0.3% compared with the initial estimate of 0.2%. External demand added an unchanged 0.2%. On a quarter-on-quarter basis, the initial estimate of a 0.1% fall was revised higher to growth of 0.1%, although this was also below the forecasted 0.3% expansion.
Market Overview
CR = Capital return; LC = Local currency
Source: Lipper for Investment Management
Past performance is not a reliable indicator of future performance
UK equities rose in March, with similar gains for the FTSE 100 and mid cap FTSE 250, with the former reaching a 12-month high. Sentiment was supported by the UK economy returning to growth in January, as well as inflation falling by more than expected to its lowest level since September 2021.
US indices finished the month higher, as shown by the S&P 500, as positive economic data, strong corporate earnings updates and the prospect of lower interest rates supported performance. European markets, as demonstrated by the FTSE World Europe ex UK Index, also rose with some indices recording new highs amid resilient economic data, positive corporate newsflow as well as the hopes of interest rate cuts. The weaker yen helped the Japanese Nikkei 225 Index produce a gain.
It was a positive month for Asian markets, as shown by the performance of the broad MSCI Asia ex Japan Index. Taiwan and South Korea performed well, whilst the Chinese market also rose as concerns eased over deflation and the economy. Global Emerging Markets, as demonstrated by the broad MSCI Emerging Markets Index, also rose led by the emerging Asia region. However, there was weakness in Latin America, notably in Brazil where the index finished lower.
UK fixed income markets rose in March, driven by increasing optimism that interest cuts were getting closer. Government bonds (FTSE Actuaries UK Conventional Gilts Index) outperformed investment grade bonds.
This update is intended to be for information only and should not be taken as financial advice.
