In February, investors dialled back their rate cut expectations in both the US and the euro zone. In the US, in spite of the emergence of more tangible signs that the US economy is slowing, the rebound in consumer prices and production in January, coupled with the message from Fed members on monetary policy that will remain restrictive for longer, helped lift sovereign yields. In the euro zone, ECB members also reiterated their caution and tamped down investors’ expectations of a rate cut, which also lifted sovereign yields. The announcements at the beginning of the month of potential losses by banks in the US (New York Community Bancorp), Japan (Aozora) and Europe (Deutsche Pfandbriefbank) briefly rekindled concerns about the weakness of the commercial property market, especially in the US. However, these factors did not have an adverse impact on equity markets, which rose in February on solid earnings in both the US and Europe, in particular on the AI segment. In China, the PBoC further eased its monetary policy while January saw further deflation and an ongoing ebbing of credit demand.
In the euro zone, economic activity showed signs of improvement in February, as illustrated by the preliminary PMI indices for February. These showed a rebound in activity in services, which returned to the expansion threshold (at 50), a sign of economic improvement despite the difficulties in German industry (illustrated by the weakness of its industrial production and manufacturing PMI index). This underpinned the rise in short- and long-term European sovereign yields, as did the caution of ECB members, a large majority of whom expressed their wish to limit the risks of premature easing of monetary policy (a position also reiterated in the minutes of the ECB's last meeting). Preliminary national inflation data for February presented a mixed picture. While inflation is slowing more than expected in Germany (+2.5% y-o-y vs. +2.6% expected and +2.9% in January), core inflation, driven by services, is not weakening (+3.4% as in January). But the slowdown in European negotiated wages at the end of last year (Q4-2023) is a positive signal in favour of gradual easing of the labour market. Despite the rise in European sovereign yields (up almost 30bp over the month for the German 10-year maturity), sovereign spreads between Germany and peripheral countries, particularly Italy, continued to narrow (below 150bp for the Italy-Germany 10-year spread).
In France, the Banque de France and national statistics body INSEE forecast, in their respective business surveys, very modest French growth at the start of the year (between +0.1% and +0.2% sequentially in Q1-2024). The government also revised its growth forecast down (+1% in 2024 vs +1.4% previously). In order to meet its target of a public deficit of 4.4% of GDP in 2024, the government ruled out any tax increases and introduced a €10bn savings plan impacting the operating costs of ministries and public policies.
In the UK, the Bank of England kept its key rates unchanged at 5.25%, a decision supported by six of its nine members. The Bank took account of the faster than expected fall in inflation, and therefore removed the upside risk bias on its key rates from its statement. Nevertheless, Governor Andrew Bailey was careful to point out that patience would prevail before a first cut. Although the British economy entered a technical recession in Q4 2023 after two consecutive quarters of contraction (-0.3% q-o-q in Q4 vs -0.1% in Q3) in the wake of the fall in consumption, since then the trend has been more favourable (the PMIs for the start of the year are moving into expansion territory). Furthermore, UK inflation remained high in January (+4%, as in December), and wages continue to grow at high rates.
In the United States, while February began with positive surprises for US employment (rise in job creations, acceleration in wages) and the services sector (rise in the ISM services index) in January, signs of a slowdown in US growth began to emerge during the course of the month. Retail sales and industrial production both fell in January. However, US CPI inflation slowed less than expected, with its underlying component, excluding energy and food, showing no signs of weakening (+3.9% y-o-y), and the producer price index rebounding. Against this backdrop, a number of Fed members have expressed caution about the timing of a first rate cut, and, including in the minutes of the last monetary policy meeting, have expressed their desire to wait for more tangible signs that inflation is returning to target. Overall, these factors contributed to the increase in US sovereign yields (by almost 40bp for the 10-year), but did not prevent the S&P 500 from rising (+5%) and outperforming its European counterpart (Stoxx Europe 600: +2%). Despite renewed fears about certain commercial banks and the commercial property sector (particularly given the difficulties of New York Community Bancorp), investors focused on a Q4 2023 earnings reporting season that generally exceeded expectations, especially in the artificial intelligence segment, as evidenced by the new stock market record set by Nvidia (+29% in February). In addition, monetary tightening has continued to have an impact on banking conditions, according to the Senior Loan Officer Opinion Survey (SLOO) carried out by the Fed on bank lending in Q4 2023.
In China, the central bank announced that it was easing its monetary policy by cutting its key 5-year rate by 25bp to 3.95%, in order to support the crisis-hit property sector, especially as the economy continued to deflate in January. At the beginning of the month, the January Caixin activity PMIs disappointed expectations somewhat, and credit growth hit a 2003 low in January. The country's equity markets, nevertheless, rose by a notch (Hang Seng up 6%), but this only very partially offset the developments of previous months, which were marked by a long period of haemorrhaging for Chinese financial assets
In terms of raw materials, oil prices rose slightly (to $82/barrel), buoyed by the improved outlook for demand. The price of European gas (Dutch TTF) continued to fall below €30/MWh, due to the mild winter and the diversity of supply. Lastly, the FAO agricultural price index continued to fall in February on the back of lower cereal and meat prices.
Completed on 12th march 2024