Investment Institute
Weekly Market Update

Take Two: US rates set to increase but at slower pace; Eurozone inflation revised up

  • 27 February 2023 (3 min read)

What do you need to know?

US interest rates will need to increase further, albeit at a slower pace, policymakers agreed at the latest Federal Reserve monetary policy meeting. The minutes showed that this would “better allow them to assess the economy’s progress” towards maximum employment and price stability. As inflation remains “unacceptably high”, a period of below-trend real GDP growth would bring supply and demand into balance, reducing price pressures, they agreed. However, some felt there was an “elevated” chance the US could enter recession this year. Data last week showed the US economy grew at an annualised rate of 2.7% in the fourth quarter (Q4), less than the earlier estimate of 2.9%, as consumer spending was revised down.

Around the world

Inflation in the Eurozone was higher than expected in January, though still down from the month before, while core inflation continued to rise. Annual inflation stood at 8.6%, slightly higher than the 8.5% estimated, but still a marked improvement from December’s 9.2%. However, core inflation – excluding energy, food, alcohol and tobacco – rose 5.3% in January compared to 5.2% the month before, suggesting price pressures will remain a concern for the European Central Bank. Meanwhile Eurozone business activity rose to a nine-month high in February as increased demand, improved supply chains and greater confidence drove momentum. The flash composite Purchasing Managers’ Index (PMI) rose to 52.3 in February from 50.3 in January.

Figure in focus: €100

The cost of permits on the European Union’s (EU) carbon market surpassed €100 for the first time last week – representing the price per tonne that companies must pay for releasing carbon dioxide into the atmosphere. The contracts, known as the ‘EU Allowance’, form part of the EU’s Emissions Trading System and rose to a high of 101.25 last Tuesday – a fivefold increase in the last three years, according to one report. The system serves as a key tool in the bloc’s fight against climate change by incentivising greater investment in low-carbon technologies, in line with the EU’s goal of carbon neutrality by 2050.

Words of wisdom:

Shunto wage talks: Annual salary negotiations in Japan between labour unions and the country’s largest companies, usually taking place in February and March. These discussions decide pay increases for the year and have come to be closely monitored by global investors – interpreted as a potential indicator of the Bank of Japan’s (BoJ) next policy moves. Prime Minister Fumio Kishida has encouraged companies to increase pay, while BoJ Governor Haruhiko Kuroda has suggested 3% wage growth is a prerequisite to ending the Bank’s longstanding ultra-easy monetary policy. Meanwhile, Japan’s core inflation reached 4.2% year-on-year in January, a 41-year high – likely to add to the pressure on BoJ policymakers.

What’s coming up

Japan’s Leading Economic Index and a spate of Eurozone surveys are published Monday, including the bloc’s Economic, Services and Industrial Sentiment indices. Q4 GDP data for both India and Canada is reported on Tuesday while on Wednesday Germany posts updated unemployment numbers. A flash inflation rate for the Eurozone is announced on Thursday while February’s final composite PMIs for the UK, US and Eurozone are issued on Friday.

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    Disclaimer

    This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.

    Due to its simplification, this document is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this document is provided based on our state of knowledge at the time of creation of this document. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision.

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