FTSE managed to notch up another 0.89% after showing recent signs of finally coming to life

The UK’s Office for National Statistics confirmed on Thursday that the economy contracting by 0.3% in the final quarter of 2023, following a 0.1% contraction in the third quarter.

This confirms a ‘technical’ recession, although as we’ve pointed out several times, this is a fairly meaningless phrase as we saw no actual signs of a recession, such as higher unemployment, and the latest monthly GDP figures suggest that it may have been the shortest ‘technical’ recession in history.

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In Europe

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Most European markets advanced in a week of generally light trading ahead of the Easter holiday weekend, with the STOXX Europe 600 Index reaching a record intraday high and gaining 0.59%. The markets’ gains came despite confirmation of a significant slowdown in some major economies.

European government bond yields declined. The European Central Bank (ECB) has flagged a possible rate cut for June, depending on whether wage growth continues to moderate. With data showing eurozone bank lending stagnated again in February, ECB council member Fabio Panetta was the latest to flag a turn in the rate cycle.

Germany’s Federal Statistical Office reported that retail sales had plunged 1.9% in February — well below consensus expectations for a small increase and the biggest drop in 17 months. Meanwhile, leading economic institutes in Germany said that they expected the country's economy to grow by 0.1% in 2024, cutting the prior forecast of 1.3%. High interest rates, weak global demand, and political uncertainty dented hopes for a stronger recovery.

Perhaps because of the region’s easing energy worries, data suggested that European consumers were growing somewhat more optimistic. On Thursday, the European Commission reported that its gauge of consumer confidence had increased to its highest level in over two years, thanks to “slightly less pessimistic expectations about the general economic situation.” According to the report, consumers’ plans for major purchases remained stable, and industry confidence improved marginally.

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In the US

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Most of the major US indexes also advanced over the shortened trading week to end a quarter of strong gains. The S&P 500 Index recorded new closing and intraday highs to end the week. The market’s advance was notably broad, with an equal-weighted version of the S&P 500 Index gaining 1.64%, well ahead of the 0.39% increase in the more familiar market-weighted version. Small-caps also easily outperformed large-caps, and the Russell 1000 Value Index gained 1.79%, in contrast with the 0.60% decline in its growth counterpart. Markets were closed on Friday in observance of the Good Friday holiday but were scheduled to reopen on Monday in advance of many international markets.

Consumer indicators, however, were mixed. On Tuesday, the Conference Board announced that its index of consumer confidence declined slightly in March, defying consensus expectations for an increase. “Consumers’ assessment of the present situation improved in March,” the Board’s chief researcher noted, “but they also became more pessimistic about the future.”

U.S. Treasuries generated positive returns for the week, with new issuance was easily absorbed. Elevated issuance weighed on the tax-exempt municipal bond market, however, amid a historically weaker seasonal period for the asset class.

In the investment-grade corporate bond market, issuance ended just above expectations and deals in the beginning of the week were oversubscribed.

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In Asia

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Japan’s stock markets fell through Thursday’s trading. Investor focus was on the sharply depreciating yen, which hovered near JPY 152 against the U.S. dollar — which is perceived by many as a point that could trigger authorities to intervene in the foreign exchange markets to prop up the Japanese currency. The country’s three main monetary authorities suggested after meeting on Wednesday that they could be ready to stage such an intervention, in the strongest hint to date and after the currency dipped to a 34-year low. The historic weakness in the yen has benefited many of Japan’s large-cap exporters, as they derive a significant share of their earnings from overseas.

The yield on the 10-year Japanese government bond fell to about 0.70% on Thursday, from 0.74% at the end of the prior week. This followed the Bank of Japan’s (BoJ’s) historic monetary policy shift, whereby it raised interest rates from negative territory for the first time in about seven years. Market expectations appear to be converging around two more BoJ interest rate hikes within a one-year period.

Chinese stocks declined for the week ended Thursday as concerns about the continuing property sector downturn weighed on investor confidence. The Shanghai Composite Index retreated 1.23%, while the blue chip CSI 300 gave up 0.68%. In Hong Kong, the benchmark Hang Seng Index edged up0.25%, according to FactSet.

Chinese Premier Li Qiang told participants at the China Development Forum, an annual summit for global business leaders, that the country is open to foreign investment. Premier Li also pledged that the government will step up measures to support growth in several sectors, including biological manufacturing, artificial intelligence, and the data economy.

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Fed update

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We promised an update on the Federal Reserve’s preferred gauge of underlying inflation which came out on Good Friday while the markets were closed.

In short, it cooled a little while household spending rebounded.

The so-called core personal consumption expenditures price index, which strips out the volatile food and energy components, increased 0.3% from the prior month, data out Friday showed. That followed a 0.5% reading in January, marking the biggest back-to-back gain in a year.

Even though the number was slightly below last months increase, it was still an increase. To be inline with the Feds target, it needs to come in around 1.6%. 0.5% in January and 0.3% in February is not good news, although US commentators will certainly try to make it sound positive.

Fed officials may take some comfort in a tame increase in a narrower gauge of services inflation within the report. At the same time, inflation-adjusted consumer spending exceeded all estimates on the heels of the biggest gain in wages in over a year, according to the report from the Bureau of Economic Analysis.

Chair Jerome Powell said the figures were “pretty much in line with our expectations” and reiterated the central bank doesn’t need to rush to cut interest rates. Policymakers will have access to one more PCE report, in addition to others on consumer and producer prices as well as employment, before their next meeting starts on April 30.

Officials pay close attention to services inflation excluding housing and energy, which tends to be more sticky. That metric stepped down to 0.2% from a month ago after a 0.7% surge in January, according to the BEA. Health care and financial services registered much smaller increases than in the prior month.

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The week ahead

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Another shortened week lies ahead, though the quiet start gives way to a busier period with the release of the monthly US payrolls data, as well as the ISM purchasing managers indices (PMIs) in the US and the Caixin PMIs in China.

Eurozone inflation will also be worth watching as the European Central Bank (ECB) edges closer to rate cuts in the summer. Corporate data is almost non-existent, but US earnings season is just around the corner, starting on 14 April.

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Have a great week and enjoy the rest of the Easter weekend.

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