January saw a rebound in European and US sovereign yields, against a backdrop of investor expectations of less strong monetary easing on both sides of the Atlantic. This trend may be due to the remarkable resilience of the US economy, which contrasts with sluggish growth in the euro zone in Q4 2023, even though European and US equity markets are moving broadly in the same window (c. +1/+2% for the Stoxx Europe 600 and the S&P 500). The Fed and the European Central Bank (ECB) left their monetary policy unchanged at their meetings and remained cautious as to the next steps to be taken, despite the ongoing disinflation process. In China, the growth target set by the authorities was finally met in 2023, despite the persistence of structural difficulties. The substantial fall in Chinese equity indices led the authorities to step up measures aimed at restoring investor confidence and supporting the economy, such as the reduction in the reserve requirement ratio for banks. Lastly, the resilience of the global economy, and that of the US in particular, and geopolitical tensions in the Middle East contributed to the rise in oil prices over the month.
In the euro zone, the ECB made no changes to its conventional (key rates maintained at 4%) or unconventional tools (the shrinking of the balance sheet to accelerate as flagged in the second half of 2024) following its monetary policy meeting. The ECB remained cautious in its communication on the timetable for rate cuts, maintaining a data-dependent approach, particularly awaiting the results of the first-quarter wage increases, which will be published in the spring. While ECB members have made a number of statements suggesting that monetary easing is on the way, the date on which the first rate cut will take place is still a matter of debate. Inflation continued to fall in January, with the headline figure coming in at +2.8% y-o-y (vs. +2.9% in December) and the core figure at +3.3% (vs. +3.4% in December). According to preliminary growth data, the European economy avoided recession in Q4 (zero growth sequentially vs. -0.1% in Q3), though this masked major disparities between countries, notably between Germany (-0.3%) and Italy (+0.2%) and Spain (+0.6%). The PMI activity indicators sent out mixed signals, showing a slight rebound but remaining in contraction territory, indicating that weakness in activity in the euro zone is gradually easing. Lastly, the ECB's quarterly Bank Lending Survey highlighted the moderation in the pace of deterioration in banks' lending conditions in Q4.
In France, as in the euro zone, the economy grew at a sluggish pace in Q4 (0% sequentially, stable vs. Q3 revised to 0%), due to lacklustre domestic demand. Headline inflation slowed in January after picking up in December (+3.1% in January y-o-y vs. +3.7% in December). The PMIs remained in contraction territory (below the 50 threshold, at 44.6 in January vs. 44.8 in December for the composite index): in the manufacturing sector, activity continued to contract, but at a more moderate pace than expected in January, while activity in services deteriorated by more than had been forecast.
In the United Kingdom, the monthly growth statistics posted a slight rebound in activity in November (+0.3% m-o-m for the latter vs. -0.3% in October), driven in particular by services, a trend also underlined by the PMIs, which improved in January (composite index at 52.9 vs. 52.1 in December). Wage growth slowed in November and is still subject to methodological revisions, but remains high (excluding bonuses: +6% y-o-y vs. +6.2% in October), while UK inflation rebounded beyond expectations in December, for both headline and core (respectively +4% vs. +3.9% in November y-o-y and +5.1% y-o-y, stable), with in particular a marked rise in services prices (+1% m-o-m, notably in transport services).
In the United States, the Fed maintained its target range for key rates at 5.25-5.5% at its monetary policy meeting, a decision widely expected by investors. However, the press release changed from mentioning a possible further tightening previously to referring to the possibility of a rate cut, while insisting that it was still too early to consider this and that a data-dependent approach should be maintained. The statistics published this month show that the economy is still resilient and that a disinflation process is occurring gradually, which has contributed to the rebound in sovereign yields (10-year: +15bp over the month). On the one hand, growth largely exceeded expectations in Q4 2023 (+0.8% q-o-q after +1.2% in Q3 2023), driven in particular by household consumption and investment. On the other, the labour market has been slow to cool down, given the brisk non-farm job creation in December (216k vs. 173k in November), while the unemployment rate remained stable (at 3.7%) and hourly wage growth rebounded (+4.1% y-o-y vs. +4% in November). While the CPI inflation rate rebounded in December (+3.3% y-o-y vs. +3.1% in November), the PCE inflation rate, the Fed's preferred indicator, remained stable (at +2.6%), while its core components, excluding energy and food, slowed. Finally, Congress adopted a new provisional budget, postponing the date of a possible shutdown to March 1, and the leaders of the two parties in Congress, Mike Johnson and Charles Schumer, have reportedly reached agreement on a budget for fiscal 2024.
In China, GDP data for Q4 (+5.2% in 2023, just above the authorities' target of 5%; +1% in Q4 on a sequential basis) as well as consumption and investment statistics in December underscore the struggles of the economy, which continued its deflationary trend in December. The Chinese authorities have stepped up measures to boost investor confidence (contributing for a time to the rebound in Chinese equity indices, but not preventing them from falling by around -9% in January), in particular with the announcement by the People's Bank of China of a 50bp reduction in the reserve requirement ratio for banks, the purchase of domestic equities and an incentive to limit short-selling. Taiwan's Democratic Progressive Party (DPP), which has been in power since 2016 and favours the country's independence, won the presidential election, although it conceded its majority in parliament to China's nationalist party, the Kuomintang.
In terms of commodities, oil prices rose sharply in January, driven by the resilience of the global economy and, to a lesser extent, by geopolitical risk, which ultimately eased in the wake of rumours of an agreement between Israel and Hamas, contributing to the fall in the price of Brent towards the end of the month. At the same time, European gas prices fell towards €30/MWh. Finally, the FAO agricultural price index continued to fall in January, due to lower grain prices.
Completed on 15th february 2024