Investment Institute
Weekly Market Update

Take Two: US inflation eases; Japan falls into recession

  • 19 February 2024 (3 min read)

What do you need to know?

US annual inflation eased to 3.1% in January from 3.4% in December - higher than the 2.9% analysts were expecting, but still the lowest rate since June last year. Higher housing and food prices offset a decline in petrol prices, while core inflation, which excludes more volatile food and energy prices, remained unchanged at 3.9%. The data reinforced market expectations that the Federal Reserve (Fed) will hold interest rates in March and begin easing later than anticipated. Elsewhere, UK inflation remained unchanged at 4% in January from December, lower than market expectations of an increase to 4.2%, supporting expectations of Bank of England rate cuts in the coming months.

Around the world

Japan unexpectedly fell into recession in the last three months of 2023 with GDP contracting 0.4% on an annualised basis, below market forecasts of 1.4% growth. This followed a fall of 3.3% in the third quarter (Q3) - two consecutive quarters of contraction signify a recession. High inflation weakened private consumption, while capital expenditure also fell. Elsewhere, the UK economy also slipped into recession at the end of 2023. GDP contracted 0.3% in Q4 compared with the previous three months, following a 0.1% fall in Q3, with a slowdown across services, production and construction. Economists had expected a 0.1% decline in Q4.

Figure in focus: 2.6%

Eurozone industrial production significantly outpaced market expectations in December, increasing 2.6% month-on-month following a 0.4% rise in November, beating forecasts of a 0.2% decline. Year-on-year, output grew 1.2% in December from a 5.4% contraction in November. The increase was partly due to a 23.5% jump in production in Ireland, where monthly industrial data has tended to be volatile recently due to fluctuations in contract manufacturing and outsourcing. Meanwhile Eurozone Q4 GDP growth was confirmed at 0% in a second estimate, meaning the bloc narrowly avoided a recession in the last three months of 2023.

Words of wisdom

Climate transition bonds: Unlike green bonds, where the proceeds are used for environmentally friendly projects, transition bonds are designed to raise financing to support the progress to a low-carbon economy - for example via projects that will reduce emissions. Already used by some corporates, last week Japan became the first country to issue sovereign climate transition bonds, offering ¥800bn ($5.3bn) in 10-year bonds as part of its plan to reach net zero by 2050. The proceeds will be used for a range of initiatives including subsidies for low-carbon transport, renewable energy as well as research and development.

What’s coming up?

Canada issues inflation figures for January on Tuesday, while the Fed publishes the minutes from its latest monetary policy meeting on Wednesday. Thursday will see the Eurozone report final inflation data for January, when flash February Purchasing Managers’ Indices are also published for the bloc as well as Japan, the UK and US. Germany issues its final Q4 GDP growth data on Friday as well as its Ifo Business Climate index for February, a closely watched indicator of the country’s economic health.

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