March 2024 Investment & Economic Update

The FTSE 100 index of leading UK company shares closed at the end of February at 7,630.02, more or less the same value as it started the month (7,630.57).

The FTSE 100 and European stock markets started the month with gains on Friday, after both the US on Thursday and Asia on Friday saw strong trading sessions. This improvement came as traders felt relieved by the latest US inflation figures.

Inflation Slowdown

US consumer prices rose at their lowest rate in almost three years, as shown by the Federal Reserve’s preferred inflation gauge. This keeps the possibility of a US interest rate cut in June alive.

The personal consumption expenditures (PCE) price index increased by 2.4% in January, as reported by the Commerce Department’s Bureau of Economic Analysis. This is the smallest year-on-year rise since February 2021, following a 2.6% rise in December.

After this announcement, bond markets saw an uptick, with UK gilt yields previously reaching a three-month high due to concerns over inflation in Europe.

Yields, the returns the government agrees to pay to those who buy its debt, which usually decreases when prices go up, have dropped across Europe following the US data.

House Prices Rebound

According to Nationwide, UK house prices have started to rise again for the first time in over a year, thanks to lower mortgage rates.

Property values increased by 0.7% from January to February, making the average house worth £260,420. Over the year, house prices rose by 1.2% in February after a 0.2% drop in January. This is the first time since January 2023 that Nationwide has reported a yearly increase in house prices.

Nationwide’s chief economist Robert Gardner said: “House prices are now around 3% below the all-time highs recorded in the summer of 2022, after taking account of seasonal effects. The decline in borrowing costs around the turn of the year appears to have prompted an uptick in the housing market.”

China’s Continued Contraction

In February, factories worldwide found it hard to recover from a downturn, with Germany, a leading industrial nation in Europe, facing a significant drop in demand. At the same time, China’s irregular recovery cast a shadow over some positive developments in Asia.

A series of business surveys published on Friday showed mixed results in Europe and Asia as the first quarter ended. Manufacturing activity in the eurozone kept shrinking last month due to low demand, even though companies were hopeful about the coming year.

According to an official survey released on Friday, China’s manufacturing sector contracted for the fifth consecutive month in February. This puts more pressure on the Chinese government to introduce additional economic support measures as it prepares for an important yearly parliament meeting next week.

The official manufacturing purchasing managers’ index (PMI), issued by the National Bureau of Statistics (NBS), decreased to 49.1 in February from 49.2 in January, with a notable decrease in production. The PMI was under the 50-point mark that distinguishes growth from decline, matching the median prediction of 49.1 from a Reuters survey.

OPEC+ Decision Awaited

Oil prices increased on Friday and were on track for weekly rises as investors were looking forward to a decision from OPEC+ on supply plans for the next quarter, taking into account new economic data from the US, Europe, and China. By mid-morning, Brent futures for May had increased by 83 cents, or 1.01%, to $82.74 a barrel.

The Brent futures for April had closed at $83.62 a barrel on February 29. Meanwhile, the US West Texas Intermediate (WTI) for April climbed 81 cents, or 1.04%, to $79.07 a barrel.

Trade Diversification Benefit

The United States’ leading trade representative, Katherine Tai, told the BBC that the significant decrease in trade with China might actually be a good sign. She explained that this reduction “isn’t necessarily a bad thing” and could indicate that both countries are diversifying their trade.

Last year, trade between the world’s two largest economies dropped by 17%. This decline occurs as the global economy faces increasing divisions, highlighted again by the US launching an investigation into the potential national security threats posed by Chinese-made cars. The concern is that these vehicles, equipped with technology, could gather personal information or be controlled from a distance.

While Chinese car manufacturers are growing their market share globally, they have almost no footprint in the US market, partly because of existing 25% import duties.

The White House has called its investigation “unprecedented” and a justified reaction to Chinese policies that limit foreign car companies’ operations. In the past year, the US’s imports from China decreased by over 20% to $427 billion, while exports to China fell by 4% to just under $148 billion (£117 billion).

India’s Economic Surge

India has kept its position as the fastest-growing major economy in the world, with an 8.4% increase in the last quarter of 2023 compared to the same period the previous year. This growth comes at a time when India is preparing for a general election this year.

Prime Minister Narendra Modi shared on X, the platform previously known as Twitter, that this growth highlights “the strength of the Indian economy and its potential.”

India’s expected to soon surpass Japan and Germany to become the world’s third-largest economy. This impressive growth was mainly driven by the country’s manufacturing sector, which saw an 11.6% expansion during this period.

Private consumption, accounting for nearly two-thirds of India’s GDP, also went up by 3.5%. Last year, the cost of essential items like onions rose, affecting people’s ability to spend. The government responded by introducing measures to control the rise in food prices.

Prime Minister Modi has increased government spending on infrastructure and provided incentives for manufacturing various products, including phones, electronics, drones, and semiconductors. These efforts are aimed at enhancing India’s competitiveness in the global market.

Consumer Discipline Lacking

According to a senior official, the Bank of England is facing challenges in reducing inflation to its target level because the current price increases are largely unaffected by higher interest rates.

During a talk at a Financial Times event, Catherine Mann pointed out the issue is with a “lack of consumer discipline” that fails to limit the pricing power of businesses, especially in the services sector, where prices are often resistant to change. These prices reflect the domestic economic situation rather than international disturbances.

She noted that individuals with higher incomes, who still have money to spend on non-essential items despite increased mortgage costs, are spending a significant amount on travel, dining out, and entertainment. This spending pattern is keeping the inflation of service prices high, preventing inflation from returning to the 2% goal, despite the fall in energy prices and stable prices of goods.

Mann emphasised the importance of consumer behaviour in controlling what companies can charge, stating that there’s not enough restraint being exercised by consumers across a broad range of service categories to noticeably slow down the rise in service prices.

Market Data

£1 buys $1.2643 or €1.1687. Gold is $2,050.30 an ounce, and UK natural gas futures are 62.71p/therm, down from 72.30p/therm at the start of February. The UK 10-year gilt yield is 4.247%, up from 3.793% at the start of February.

Kellands will continue to keep you updated on market developments on a regular basis. However, if you have any questions or need some financial advice in the meantime, please do not hesitate to get in touch.

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