After a subdued start this week, equity markets regained their momentum by Thursday, with fresh all-time highs set in the US, France and Germany, helped by a little more clarity from the central banks after several weeks of pushing back on near term expectations for interest rate cuts
It has been a busy week of news, including the UK Budget, ‘Super Tuesday’ in the US, the European Central Bank meeting and the China Economic Work Conference. However, pretty much all of these events went ‘as expected’.
The Spring Budget in the UK took place on Wednesday and Chancellor Jeremy Hunt delivered few surprises, with most of the policy announcements having been pre-announced in recent weeks. Whatever happened to Budget purdah?! The government will hope that the headline grabbing 2 percentage point cut to national insurance payments will boost their electoral chances, though a similar cut last Autumn failed to have any impact on the opinion polls. The Office for Budget Responsibility updated their economic forecasts; they now see the UK economy growing by 0.8% in 2024, up from the 0.7% forecast in November. 2025 is expected to see growth of 1.9%, with growth of 2.2% in 2026. Inflation is expected to ease to the 2% Bank of England target “in a few months”, with inflation for 2024 averaging 2.2%, well down from the 3.6% previously forecast.
In the US, the Super Tuesday round of primaries delivered no significant surprises with Donald Trump and President Biden now near certainties to secure their respective parties nominations for the Presidential election on November 5th. On the Democrat side, Biden has no real rivals (other than the ageing process) while the only other Republican candidate, Nikki Haley, ended her campaign on Wednesday. Election years are generally positive for US equities, and this year we have seen US indices make a very strong start to the year. As a rule, markets tend to consolidate in the weeks after Super Tuesday, as the likely candidates become known, and their expected policies come under closer scrutiny. This year however, with the likely candidates arguably known for a long time already, their policy intentions may well have already been digested by markets. Both candidates face significant fiscal challenges given the run up in debt in recent years, and more recently the increasing costs of servicing such high debt levels have come into focus given the return of interest rates to more ‘normal’ levels. Trump also continues to face legal challenges, though the Supreme Court ruled this week that states such as Colorado were wrong to exclude him from the ballot for his role in disputing the 2020 election result and subsequent Capitol riot. Polling continues to put Biden and Trump neck and neck nationwide, but Trump appears to have the edge in the ‘swing states’ that will determine the winner.
The polls do suggest that of his legal issues, the only conviction that could derail Trump is the case over the Capitol riot, and Trump’s role in causing it by questioning the 2020 election outcome and encouraging supporters to contest the result, which resulted in the Washington D.C. riots in January 2021. But time may be on Trump’s side – his lawyers are playing a clever tactical game in terms of delaying tactics, such that the trial may not even take place before the election. There are likely to be many more twists and turns between now and November – President Biden will use all the tools at his disposal to keep the US economy ticking along while Trump will continue to encourage Republicans in Congress to delay and obstruct policymaking as much as possible. Biden reminded Americans of the strength of the economy and low unemployment in his State of the Union address, but this economic strength is yet to translate into stronger approval ratings for the President. He called the resilience of the US economy “the greatest story never told”.
The European Central Bank kept interest on hold, as expected, but expectations firmed up for a June cut after their inflation and growth projections were revised lower. The ECB expects CPI to be 2.3% this year, 2.0% in 2025 and 1.9% in 2026. Core inflation is expected to be 2.6% this year easing to 2.0% in 2026. The ECB expects economic growth in 2024 to be just 0.6%. ECB President Christine Lagarde steered markets towards a June cut, saying “we will know a little more in April but we will know a lot more in June”. Market pricing shows an April rate cut has a probability of just 14%, June is a 92% probability. In the US, Federal Reserve Chair Jay Powell sticks to the script in his semi-annual testimony to the US Congress. Powell continued to support expectations of rate cuts this year but maintained the Fed needs to see more evidence of inflation being durably back at target levels. Powell Says “it will likely be appropriate to begin dialling back policy restraint at some point this year”, which was in line with recent signals that the Fed were still planning to cut rates in 2024. Markets responded positively to Powell’s comment that the Fed is “not far” from the confidence it needed to “begin to dial back the level of restriction” but Powell warned that “ongoing progress toward our 2 percent inflation objective is not assured”, and that the FOMC “does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainable toward 2 percent.”
The China Economic Work Conference has been taking place in Beijing this week, with the highlight being the setting of a growth target of 5%, as expected. Premier Li Qiang pledged that China would remove restrictions for foreign investment in manufacturing while announcing issuance of “ultra long” government bonds worth $138bn of major projects. Defence spending will rise by 7.2%, the largest increase in five years. Li Qiang said “the foundation for the continuous recovery and improvement of our country’s economy is still not solid, with insufficient demand, overcapacity in some industries, weak societal expectations and many lingering risks”. The government forecast the creation of 12 million jobs this year, with unemployment of 5.5% and inflation of 3%. 2023 growth was 5.2%, against a target of 5% but this number was flattered by base effects as China reopened post-pandemic. Premier Li acknowledged the challenges facing the world’s second-largest economy, saying “It is not easy for us to realize these targets… we need policy support and joint efforts from all fronts.” With the $138bn of spending on major projects, the piecemeal stimulus continues but the long-awaited stimulus ‘bazooka’ remains absent.
Have a good weekend,
Regards,
Anthony.
