MACRO DEVELOPMENTS
US: Mixed Economic Signals, GDP Growth Slows, Inflation Surges, and Fed
Adopts a Hawkish Tone
Despite a very strong end to 2023 (which marked seven consecutive quarters of
increase), the US GDP expanded by 0.4% in the first quarter, which was significantly less
than predicted. Surprisingly, the carefully watched ISM manufacturing index for April
showed a modest drop-in activity. The jobless rate declined as employment growth
picked up speed in March, but the labor market held firm. However, for the fourth
straight month, US CPI inflation shocked to the upside. Core inflation, which is driven by
necessities services, remained at 3.8%, while total inflation increased to 3.5%. In April,
even in the absence of a Federal Reserve meeting, Powell and his fellow members of
FOMC appeared to adopt a more assertive tone. Fed chair hinted a stickier inflation and
data could postpone the easing cycle’s beginning.
Europe: Economic Recovery, Production Grows, Inflation Declines, and ECB
Considers Rate Cut
Meanwhile, Europe emerged from its technical recession. Eurozone production for the
first quarter grew by 0.3% more than expected, while monthly data from the UK
indicated a swift rebound from end-of-year contraction. PMIs showed continued
strength in the services sector in April, although manufacturing remained subdued. Core
inflation continued its gradual decline in the Eurozone (2.7%) and the UK (4.2%).
Swiss inflation remained moderate in March, both the general and core inflation
rates unexpectedly fell to 1% YoY. In contrast, the ECB signalled that the first-rate
cut could occur in June, after keeping its main interest rates unchanged at the April
meeting.
Asia: Bank of Japan Maintains Interest Rate as Yen Weakens, China’s GDP
Beats Expectations
Bank of Japan also kept its official interest rate unchanged following the previous
month’s hike, although subsequently, the yen weakened to its lowest level against
the US dollar since 1990. Lastly, China’s GDP grew by 5.3% YoY, a figure surpassing
consensus, while PMIs indicated continued expansion in both the manufacturing
and services sectors in April.
Market Impact
After five consecutive positive months, stock market sentiment reversed in April,
with widespread weakness across most regions and sectors.
The revaluation of imminent interest rate cuts was likely the most significant
factor. However, the volatility was short-lived: Stocks rebounded some of their
losses during the second half of April. In the fixed-income market, yields on 10-
year government bonds rose to new yearly highs in the US (4.7%), Germany
(2.6%), and the UK (4.4%). Commodity prices continued their ascent. Brent crude
oil barrel rose to $91, while gold surpassed $2,400, although both retraced most
of their gains by the end of the month. Industrial metals also had a strong month,
with a 13% increase.
Our Expectations
In the last quarter of 2024, monetary markets are now only expecting one interest
rate drop, significantly tempering their dovish predictions. Key elections are
scheduled in more than half of the world in the upcoming months, which might
lead to an increase in political and policy concerns.
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This Economic Outlook report was prepared by the N PrimePartners Capital
Investment team.
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