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Weekly Investment Insights

The S&P 500 and the EUROStoxx 50 were flat last week while the Nasdaq was up a touch. As earnings season continues, the IT sector is bringing the best results on both slides of the Atlantic. Now the market eagerly awaits Nvidia’s results on Wednesday. The Nikkei stood out with gains of around 5% for the week.

Germany becomes the world’s third largest economy as Japan enters technical recession

Flash data showed that Japan's GDP unexpectedly shrank 0.1% QoQ in Q4 2023, quite far below forecasts of +0.3% growth and following a revised 0.8% fall in Q3. Private consumption, which accounts for more than half of the economy, declined for a third quarter in a row. Capital expenditure, public investment and government spending all detracted from growth as well, with net trade being the bright spot as exports (2.6%) outpaced imports (1.7%).

The GDP print has three implications:
• It means that the German economy is now the third largest in the world (in dollar terms), with Japan slipping to fourth place.
• Japan is now in a technical recession, defined as two consecutive quarters of negative growth.
• It casts some doubt as to whether the Bank of Japan (BoJ) will stick to the signals it sent at its January meeting, which suggested an imminent retreat from its ultra-easy stance.

Moves by the BoJ matter for global markets. For over a decade, loose monetary policy has meant Japan is an important source of investment funds; Japanese investors net outflow to the rest of the world totals over $3 trillion, including holdings of more than $1 trillion in US Treasuries. Any rate hikes (which would be the first in 17 years), hold the potential to prompt Japanese investors to sell foreign assets and bring them home, draining liquidity elsewhere.

In January, the IMF advised that Japan takes a “gradual and well-communicated” approach to normalizing policy.

European Commission releases its Winter Economic Forecast

The European Commission has revised its GDP growth expectation for the eurozone economy in 2024, lowering it from 1.2% to 0.8%. The forecast for 2025 was also revised down to 1.5%, with a strong labour market, easing inflation, rising wages, the expected gradual easing of credit conditions as factors likely to support growth.

Regarding inflation, it is expected to decelerate faster than projected in the autumn forecast, largely driven by falling energy prices. In the euro area, inflation is expected to slow from 5.4% in 2023 to 2.7% in 2024 and 2.2% in 2025. While the expiration of energy support measures in Member States and increased shipping costs due to trade disruptions in the Red Sea may cause some upward price pressures, these factors are not expected to derail the disinflation process. At the end of the forecast horizon, it is projected that euro area headline inflation will slightly exceed the ECB target.

ZEW: The prospect of rate cuts fuels investor optimism

The ZEW Index, which measures sentiment among institutional investors, continued to rise in both Germany and the Eurozone in February, largely due to hope about central bank rate cuts.

In Germany, the index rose to 19.9, the highest level in a year, and quite a bit above the expected 17.5. More than two-thirds of respondents expect the ECB to cut rates over the next six months in light of slowing inflation, while around three-quarters believe that the Fed will start cutting imminently (leaving room for disappointment, in our eyes). The current situation sub-index, however, fell to its lowest level since the pandemic, as a reminder that Germany’s economy is in a bad place and a sudden rebound is unlikely, even if there is some light at the end of the tunnel.

The Eurozone indicator also rose to its highest level in a year, 25. This was above expectations of 20.1 and unlike the Germany equivalent, the present situation sub-index also ticked up. 51.8% of the analysts surveyed expect no change in economic activity, 36.6% expect improvement and 11.6% predict deterioration.

Source: ZEW, Bloomberg, BIL

US inflation delivers a reality check on rate cut bets

The aforementioned bets for imminent Fed rate cuts indeed look too optimistic when we take a look at the latest US inflation print. While the headline figure fell from 3.4% to 3.1% YoY in January, it was still more than the 2.9% expected by economists. On a yearly basis, core inflation failed to budge, remaining at 3.9%, versus 3.7% expected. On a monthly basis, it came in at 0.39%. We wait to see this figure within the 0.2% to 0.3% channel for around six months, in order to be sure that CPI is heading sustainably towards the 2% target.

Digging into the details, Energy costs dropped 4.6% (vs -2% in December), with gasoline declining 6.4% (vs -1.9%), utility (piped) gas service falling 17.8% (vs -13.8%) and fuel oil sinking 14.2% (vs -14.7%). Meanwhile, prices increased at a softer pace for food (2.6% vs 2.7%), shelter (6% vs 6.2%), new vehicles (0.7% vs 1%), apparel (0.1% vs 1%), medical care commodities (3% vs 4.7%) and transportation services (9.5% vs 9.7%).

The Fed’s next policy meeting is scheduled for March 19-20, at which it will release its latest “dot plot” survey showing officials’ projections for interest rates, inflation, and unemployment. Markets rule out a March rate cut and now, one in May is in question.

Source: Bloomberg, BIL

US consumers – all shopped out?

US Retail Sales, which are not adjusted for inflation, were reported to have fallen -0.8% MoM in January. Softer sales are often observed in the first month of the year, after a bout of holiday shopping in December. It is the biggest decrease in retail sales since March last year, with sales of building materials and garden equipment (-4.1%), miscellaneous store retailers (-3%), gasoline stations (-1.7%), motor vehicles and parts (-1.7%) recording the biggest declines.

Source: Bloomberg, BIL

Economic calendar for the week ahead

Monday – Spain Balance of Trade (December). US market closed for President’s Day.

Tuesday – China Loan Prime Rate. US Conference Board Consumer Confidence (January).

Wednesday –Eurozone Consumer Confidence (Flash, February). US FOMC Minutes Japan Balance of Trade, Exports (January) and Reuters Tankan Index (February).

Thursday – Eurozone HCOB PMI Flash (February) and Inflation Rate (January). France Business Confidence (February). UK S&P Global PMI (Flash, February). US S&P Global PMI (Flash, February) and Weekly Jobless Claims (February). Japan Jibun Bank PMI (Flash, February).

Friday – Eurozone Consumer Inflation Expectations (January). Germany Ifo Business Climate (February) and GDP Growth Rate (Final, Quarter 4). UK Gfk Consumer Confidence China House Price Index (January) and Foreign Direct Investment (January).