Weekly Market Update and Featured Chart #9

This illustration shows a serene landscape where a path splits into two, embodying divergence. It uses a palette of teal, navy blue, soft blue, and deep green, with a subtly textured sky in the background. A film grain effect adds a vintage feel, emphasizing the theme of choice and paths diverging.
For financial professionals only

This week’s market update highlights the latest inflation and interest rate news, as well as general market performance across the UK, US and Asia.

Here’s the key takeaways:

  • End of an era – The Bank of Japan raised interest rates for the first time in 17 years, scrapping the world’s last negative interest rate along with its yield curve control policy. The new rate sits at a hefty 0 - 0.1%. 

  • No change – The FED unanimously decided to leave interest rates at 5.25 – 5.5% for the fifth straight meeting on Wednesday. The latest Dotplot remains unchanged with three cuts amounting to 0.75% expected throughout 2024 and the same again in 2025.

  • Cooling UK inflation – UK inflation fell more sharply than expected to 3.4% in February,down from 4% in January to the lowest level in 2 and half years. However, services inflation (a key metric for policy makers) fell less than expected, from 6.5% to 6.1%.

  • Still no cuts – The BoE Monetary Policy committee kept rates at a 16 year high of 5.25% on Thursday with Governor Andrew Bailey stating the economy was moving in the right direction. There was a dovish shift in votes, with the two remaining hawks voting for no change rather than a hike.

  • Firing the starting gun – The Swiss National Bank kicked off the rate cutting cycle within G10 economies by lowering their key interest rate by 0.25% to 1.5%. Given the quarterly meeting schedule and with the Swiss franc rallying into December, this cut eases upward pressure and the need for central bank intervention. 

What does that mean for me and my clients?

Clear progress on inflation is being made in the UK and the expectation of rate cuts continues to build. The latest interest rate decisions from the US & UK central banks have all hinted that cuts are likely to come in June. As a result, equity markets continue to appreciate. However, we’ve been here before, and markets tend to get ahead of themselves. This means if expectations aren’t met, markets are at risk of selling off. 

Chart of the week

Investor Sentiment vs Economic Sentiment

Line chart of economic vs. investor sentiment Z-scores from 1998 to 2024. The black and red lines show fluctuations, converging and diverging over time. A notable split begins in 2023 with investor sentiment high and economic sentiment dropping sharply below -2.

Source: Topdown Charts, LSEG

The chart above shows investor sentiment surveys vs economic sentiment surveys. While the two tend to move in tandem, there’s been a marked divergence in 2023/24.

Why’s this worth sharing?

There’s exuberance and confidence in the US stock market right now. Surveys of investor sentiment show optimism and bullishness. Unusually, and with respect to history as well as logic, economic sentiment is at odds with this. Surveys about economic activity and expectations hint at recession and highlight much more caution. The question is, which line will have to adjust to return the relationship back to normal?

The Markets

Stock markets in the UK had a strong week of returns with the FTSE 100 & 250 returning 1.86% & 1.17% respectively. Good news in domestic markets followed positive news in the latest inflation numbers and the BoE’s latest meeting where the Governor hinted interest rate cuts in the near future.

US markets also climbed higher on the back of the latest Fed meeting where guidance for rate cuts in 2024 are still firmly in play.

After raising interest rates to remove the world’s last negative interest rate, Japanese stocks rallied hard, with the Nikkei 225 rising 6.07% on the week. The index is now up over 20% YTD as corporate governance reform and the end of the deflation story continues to drive positive sentiment. 

Weekly ChangeYtD Change
FTSE 1001.86%2.09%
FTSE 2501.17%1.18%
S&P 5001.69%10.51%
Hang Seng-0.88%-1.46%
Nikkei 2256.07%22.83%
Brent Crude-0.38%11.67%
Gold Spot0.65%5.56%
UK 10yr GILT-12bps+46bps
US 10yr Treasury-6bps-29bps

Source: FE FundInfo, figures as at close Thursday.

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.  

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