Weekly Market Update (and Chart of the Week) #3

This week's market update highlights significant movements in job figures, inflation rates, and market performance across the US, UK, and China, impacting economic forecasts.

Here’s the key takeaways:

• US job figures surpass expectations - shortly after the last update, January payroll data showed a dramatic increase to 353K. The robust performance will likely put the brakes on March rate cut talks and raise concerns for May, shaking economic forecasts.
• UK labour market shows unanticipated strength - revised data reveals an unexpected drop in unemployment to 3.9% (from the prior 4.2% estimate). This continued decline may push up wages and inflation, delaying potential rate cuts.
• China faces deflationary pressures - despite the monthly CPI rising by 0.3% (the highest since August), consumer prices continued their decline, with a sharp 0.8% year-on-year drop in January. Producer prices also fell by 2.5% year-on-year, marking the 16th month of contraction. Suggesting persistent deflationary forces.
• UK housing and retail markets diverge - while house prices surged 2.5% year-on-year (propelled by falling mortgage rates), retail sales rose by only 1.4%, reflecting the continued impact of the cost-of-living crisis on households.
• Signs of UK economic recovery - in January, the S&P Global UK CIPS services PMI and composite PMI surpassed expectations, reflecting a swift rebound from the probable recession in the latter half of 2023.

What does that mean for me and my clients?

The developments this week show a landscape of mixed economic signals that need careful navigation. Highlighting a heightened need to balance growth opportunities and risk mitigation in clients’ investments.

Chart of the week

Source: Goldman Sachs Asset Management

The chart above compares the performance of small-cap stocks vs large cap stocks around the time interest rates peaks.

Why’s this worth sharing?

History shows that US small caps tend to outperform large caps after a peak in the Fed funds rate. The last hike was July 2023 and cuts appear imminent. This means downside risk to small caps looks limited, especially with valuation discounts currently available. Which in the context of our upcoming strategic asset allocation tweaks is encouraging.

Most major indices saw healthy returns this week. Though the UK continues to lag, influenced by  economic data changing rate cut expectations. BP delivered stronger than expected results, and reiterated their clean energy strategy. Barratt Developments offered to buy Redrow, valuing the firm at £2.5bn. The historic US stock market rally persisted, with the S&P 500 closing near 5,000, driven (again) by a tech surge and robust 10-year Treasury sales. Equities extended gains, banking on a strong economy supporting corporate profits. Disney and Arm Holdings soared on positive outlooks. The MSCI World Index, mirrored the US trend, also reaching a record high during the week. The oil price jumped during the week following the Israeli PM’s dismissal of a potential ceasefire. 

This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity. Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.