North America
Large-cap equity indices closed lower across the week as investors weighed inflation surprises against signs of a moderation in consumer spending. The Dow Jones Industrial Average reached a record high on Wednesday before falling to end the week lower as Energy shares outperformed on the back of higher oil prices. Signs of easing demand and inflation weren’t enough to nullify strong declines early in the week. The Nasdaq Composite lost 0.70%, followed by the S&P 500 which lost 0.09%. The Dow Jones Industrial Average closed flat. The underwhelming performance came as the Department of Labour reported that US inflation increased to 3.2% in February – emphasising the challenges faced by Federal Reserve Chair, Jerome Powell and his team of policymakers. This exceeds consensus estimates of 3.1% (as well as January’s 3.1% figure). Core inflation (excluding food and energy costs) came in at 3.8%, a drop from the 3.9% recorded in January. The month-on-month headline figure rose from 0.3% in January to 0.4% in February. The figures have spooked investors, who are now worried that the Fed may have to wait longer before cutting interest rates from their current 23-year high. Currently, the Fed plans to reduce rates three times this year. Markets expect three or four cuts this year, beginning in June or July. “The Fed is probably still on track to cut in June,” said Citi economist Andrew Hollenhorst, who added “the last two months of inflation data show the difficulty in returning inflation to target”. Interest rate movements and inflation prints are now of critical concern for President Biden, who is pursuing an ambitious re-election campaign on a foundation of economic resilience (against former President Donald Trump). On the consumption front, US retail sales grew less than expected in February, pointing to a slowdown in consumer spending, weighed down by elevated borrowing costs. Retail sales grew 0.6% in February, while January’s 0.8% decline was revised lower to 1.1%. On the employment front, the previous week saw the US Labour Department report an additional 275,000 jobs across February, exceeding consensus estimates of 200,000. December & January’s figures were revised lower by 167,000, which appeared to overshadow the strong employment figures (January reduced from 353,000 to 229,000).

Europe & UK
European indices closed largely higher: the pan-European STOXX Europe 600 Index gained 0.31% to record a notable 8th consecutive weekly gain amid strong earnings and budding hopes of a cut in European Central Bank (ECB) policy rates. Local indices followed: the French CAC 40 and German Dax gained 1.70% and 0.69%, respectively. The UK’s FTSE 100 Index followed, gaining 0.94%. European Central Bank (ECB) policymaker, Pablo Hernandez de Cos said that his team of policymakers could start cutting interest rates as soon as June after a notable drop in euro zone inflation. The ECB opted to keep interest rates at a record high in March, but has since said it has made strong progress in bringing down inflation. “If our macroeconomic forecasts are met in the coming months, it is normal that we will start cutting rates soon and June could be a good date to start,” De Cos said. These comments were further emphasised by statements from council member Olli Rehn, who said the last week saw the ECB formally discuss rate cuts. “If inflation continues to fall and, according to our estimation, sustainably downwards towards the target, we can close to the summer already slowly start easing our foot off the brake pedal of monetary policy,” Rehn said in a statement. Comments from the ECB’s Chief Economist, Philip Lane suggested that policymakers must exercise caution and take their time to get interest rate cuts right and will likely have a better picture of inflationary pressures and intended rate cuts by June. “A lot of evidence is accumulating, but what’s also fair to say is that the transition from this holding phase, we’ve been on hold since last September since a substantial hiking cycle, we do have to take our time to get that right, from holding to dialing back restrictions,” Philip Lane said in televised interview. Lane, also said that the ECB’s March meeting represented an “important milestone” in the accumulation of evidence, and showed the “disinflation process has been ongoing.” The statements came after data showed that inflation in the 20-nation bloc eased to 2.6% in February.

Japan
Japanese equity markets declined across the week ahead of the Bank of Japan’s (BoJ) policy meeting. The Nikkei 225 and the broad TASI Index lost 2.45% and 2.10%, respectively. The week will see BoJ Governor Kazuo Ueda and his board meet across a two-day policy meeting, where they will decide if it’s time for the first rate hike in 17 years. Many now expect the BoJ to exit the negative rate regime at the meeting’s conclusion. In essence, the BoJ will look to decide on an end to the era that saw the most aggressive monetary easing in modern history. The BoJ will also have to decide on its contentious yield curve control (YCC) and asset purchases. News of the highest average wage rises since the 1990s for members of Japan’s labour unions has added to the calls for rate hikes. The BoJ has been committed to the view that monetary policy tweaks will hinge on the meeting of its 2% inflation target, driven by inflation accompanied by wage growth. Meanwhile, BoJ Governor Kazuo Ueda gave a relatively underwhelming view of Japanese growth prospects, stating that despite the moderate levels of economic recovery, there still remain economic data pointing to the negative. However, economic growth figures released early in the week showed that Japan had narrowly avoided a technical recession (determined by two consecutive quarters of negative growth). Gross domestic product in Q4 2023 grew just 0.1% in the quarter compared with the earlier release suggesting the economy had contracted 0.1%.