Finimize - 🗻 Climbing Mount Fuji

👀 WHAT JUST HAPPENED?

US

• Inflation in the world’s biggest economy cooled in January but was still hotter than expected.

Europe

• UK wage growth slowed in the fourth quarter but was still pacier than forecast.
• And Britain’s inflation held steady last month, defying expectations for a slight rise.
• It wasn’t enough to prevent the UK economy from slipping into recession.

Asia

• Japan’s economy unexpectedly shrank at the end of last year.

✍️ WHAT DOES ALL THIS MEAN?

Investors got a nasty shock last week, finding out that prices in the US rose faster than expected in January – a fact that American consumers were likely already aware of. On a year-over-year basis, overall consumer prices jumped by 3.1%, down from December’s pace, but still hotter than the 2.9% forecast by economists. Core inflation, which excludes volatile food and energy items, frustratingly remained flat at 3.9%, thanks to some still-savage gains in housing costs. Even more worrying though was the fact that core inflation actually heated up on a month-over-month basis, suggesting that the Federal Reserve just might have to wait a bit longer before it takes a knife to interest rates.

Brits were probably happy at the end of last year, bringing home a little more bacon than expected. Average annual growth in regular UK earnings (not counting bonuses) was 6.2% for the October to December period. That was less than the 6.7% pace from September to November, but more than the 6% forecast by economists. It’s good news from a payday standpoint but could be bad news from an interest rate standpoint. The Bank of England (BoE) believes it’ll be harder to return inflation to its 2% target if pay raises lead companies to pass higher wage costs onto consumers.

Britain’s central bank did get some good news last week though, with the latest inflation report showing the pace of price gains holding steady in January. Consumer prices rose by 4% last month from a year ago – less than the 4.1% forecast. And although services inflation – a closely watched measure of homegrown price pressures – accelerated to 6.5%, that was less than the 6.6% predicted by the BoE. And that happy news prompted traders to increase their bets that the central bank will start lowering its 5.25% benchmark interest rate this summer.

And a gloomy report about the health of the British economy only bolstered those rate-cut expectations. The UK economy slid into recession at the end of 2023, shrinking by a worse-than-feared 0.3% in the fourth quarter, compared to the one before. That poor showing followed a 0.1% decline in the third quarter, and meant that the British economy grew by only 0.1% during 2023 – the slowest annual expansion since 2009 (not counting Covid-afflicted 2020). And the BoE anticipates that sluggish pace to continue, forecasting a measly 0.25% for 2024.

Not wanting to be outdone, Japan unexpectedly slipped into recession at the end of 2023 too. The Land of the Rising Sun saw its economy shrink by 0.4% on an annualized basis last quarter – stunning economists who had predicted growth of 1.4%. The contraction, mainly the result of massive cutbacks in spending by households and businesses, was actually an improvement over the 3.3% annualized drop in the third quarter – albeit a dreary one. The disappointing state of domestic demand will complicate matters for the Bank of Japan (BoJ), which is talking about putting an end to its negative interest rates by raising borrowing costs for the first time since 2007.

🔍 This week’s focus: Like climbing Mount Fuji

There was one bright spot in Japan’s growth numbers: exports. They surged in December, thanks to increased sales of autos to America and chip-making gear to China. That helped drive a 2.6% jump in net exports (i.e. exports minus imports), adding 0.2 percentage points to economic growth for the quarter. But Japan’s in for a tough slog: it won’t be able to depend on external demand to offset poor domestic consumption forever, especially with some key trade partners likely to see lazier growth this year. What’s more, the BoJ is widely expected to begin hiking interest rates this year – at a time when other major central banks will be lowering theirs. That split is likely to strengthen the yen, making Japanese exports more expensive and, in turn, shrinking their demand.

In the meantime, a weak yen and the unexpected recession have landed some more bad news on Japan’s doorstep: it officially lost its title as the world’s third-biggest economy in dollar terms last year, giving up the bronze medal to Germany. And neither is assured to maintain that podium spot: both have aging and shrinking populations, which are weighing heavily on all sorts of industries. Contrast that with India: the country’s population inched ahead of China’s last year, and it’s younger too. That’s why its economy is projected to surpass both Japan and Germany in size by 2027, securing its position as the third-biggest economy.

📅 THE WEEK AHEAD

• Monday: US markets are closed for the Presidents’ Day holiday.
• Tuesday: China one-year loan prime rate. Earnings: Walmart, Home Depot, Medtronic, Palo Alto Networks.
• Wednesday: Japan trade balance (January), eurozone consumer confidence. (February), minutes of the Fed’s latest meeting. Earnings: Nvidia, Rivian.
• Thursday: Minutes of the ECB’s latest meeting, US existing home sales (January), Japan, eurozone, UK, and US PMIs (February). Earnings: Moderna, Block, Intuit.
• Friday: China new homes price index (January).

Stay classy ✌️

Your Finimize Analyst team

SPONSORED BY HEALTHWORDS.AI