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Stick or twist: The ECB stays tight-lipped on rates

market snapshot

26 January 2024 |
The latest US GDP data, Q4 earnings and the direction of ECB monetary policy topped investor concerns this week.

Fast reading

  • In the US, the latest weekly jobless data showed initial claims at 187,000 – close to the lowest level this century. GDP grew at an annualised rate of 3.3% in Q4 of 2023, beating expectations.
  • The ECB held its benchmark rate steady at 4% but remained reticent on when it will begin cuts.

Investors faced a choice of stick or twist this week as they awaited guidance from the European Central Bank (ECB) on the direction of monetary policy, along with key data reads from the US.

In the event, the ECB remained tight-lipped, offering no indication on when it will begin cutting rates, although the central bank maintained its stance that current rates are  sufficient to bring inflation down to its 2% target. It kept its benchmark rate at 4%, the highest level in more than two decades.

Orla Garvey, Senior Fixed Income Portfolio Manager at Federated Hermes Limited, expects the ECB’s outlook to become incrementally more dovish as it moves towards its March meeting, when the next round of macroeconomic projections are released. She notes that the market is pricing about 180bps of cuts over the course of the next two years, with the majority coming in the second half of 2024.

“We think, considering the progress made on inflation and the weak growth outlook, this [market consensus] is entirely reasonable,” she says. “Looking ahead, the key question is does the cycle end with rates in neutral or stimulative territory? That will partly be informed by how long the ECB waits.”

Looking ahead, the key question is does the cycle end with rates in neutral or stimulative territory?

Elsewhere, US economic growth was stronger than expected in the final quarter of last year, according to data released on Thursday. The US economy expanded at an annual rate of 3.3% in Q4, boosted by consumer spending and a resilient job market. Full-year growth came in at 2.5%, an increase on 2022. 

The latest data also boosts hopes that the US economy could be heading for a soft landing. The GDP data reflects an increase in consumer spending, state and local government spending, exports, and other areas, according to the Commerce Department.

For Mark Sherlock, Head of US Equities at Federated Hermes Limited, Thursday’s data illustrates the strength of the US economy and the resilience of the US consumer.

“While GDP growth is unlikely to remain at this level through 2024, a continually robust employment backdrop will likely mitigate against the dramatic economic downturn feared by some,” he says.

US CPI and unemployment data since 2003

Earnings season winners and losers

Elsewhere, Q4 earnings results continue to trickle in. From the pool of S&P 500-listed companies, roughly 10% have reported results for the final quarter of 2023, and, of these, 62% have reported better-than-anticipated earnings per share and revenue. However, the index is reporting a year-on-year decline in earnings for the fourth time since Q3 of 2022, indicating there are still challenges in the wider operating environment.

Lewis Grant, Senior Portfolio Manager for Global Equities at Federated Hermes Limited, underlines the lack of clarity for investors moving forward.

“Markets were generally positive as earnings season took centre stage, although investors searching for a clear indicator as to the health of the global economy will be disappointed with the lack of any strong narrative thus far,” he says.

One of the current bright spots is the semiconductor sector, where key players are benefiting from a robust order book, according to Grant.

“Semiconductor supply chains are incredibly complex, interconnected webs and are expensive to expand, and the supply chain challenges in the aftermath of the pandemic highlighted the serious economic and security implications of disruption,” he says. “The order growth in the chip manufacturing equipment space indicates that these companies are also key beneficiaries of the AI trade.”

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