US markets retreated once more ahead of a week where the words, rather than the actions, of the Federal Reserve will take centre stage.
The Fed’s two-day policy meeting will begin tomorrow, culminating in its latest interest rate decision on Wednesday. With a virtually zero chance of a rate cut priced in, investors are now moving towards being equally split between whether or not the first reduction might be on the cards for June. This follows economic data from last week which generally lessened the likelihood of an imminent cut, with inflation remaining stubborn in its final leg towards the 2% target, while the economy more broadly continues to show few signs of meaningful weakness.
Data on Friday did little to clarify the situation. US factory production rose more than expected in February, although the previous month’s figure was revised lower in the face of limited activity in the higher interest rate environment. Meanwhile, a consumer sentiment survey unexpectedly fell in March, signalling signs of a potentially weaker few months ahead even as inflation is expected to reduce.
The uncertainty weighed on each of the main indices and the more technology-focused baskets in particular, leading to a loss for the week as investors continue to digest the past, present and future as guided by the raft of economic data. Even so, the general direction of travel remains positive in the year to date, with the benchmark S&P500 having added 7.3%, the Nasdaq 6.4% and the Dow Jones 2.7%.
Asian markets were generally higher overnight, buoyed in part from some unusually positive economic news coming out of China, where industrial output and retail sales both rose by more than expected in the couple of opening months of the year. Investment growth was also ahead, although a sting in the tail came in the form of a property investment reading which showed a decline of 9%, thus keeping the calls for further stimulus from the authorities in play.
In Japan, Tuesday could mark a significant milestone, with the central bank potentially signalling an exit from the negative interest rate policy which it has pursued since 2016. Indeed, there has not been a rate rise for some 17 years, but the latest round of solid wage rises is expected to tip the balance towards a hike either this month or next. That being said, the rate of rises is expected to be introduced at a marginal pace, with consensus currently pointing to a rate of around 0.3% by December in comparison to the current negative level of 0.1%.
The central bank theme this week also extends to the UK, where the Bank of England is expected to hold rates at 5.25% barring a totally unexpected inflation print the day previous on Wednesday. Recent data showing a cooling of wage growth, itself an inflationary pressure, has been accompanied by other readings showing anaemic progress and a shallow technical recession which adds pressure on the Bank to make some moves to revive the economy. Even so, the first cut is not expected to arrive until August, with the generally difficult balancing act providing some support for sterling but also being reflected in a weak showing from the FTSE 250, which remains down by 1% so far this year.
The premier index, meanwhile, is now trading flat for the year, albeit underpinned by an average dividend yield for the index of 3.8%, which at least provides some form of return. In early exchanges, there was a glimmer of buying interest in the miners following the surprisingly positive Chinese data, with Ocado (LON:OCDO) attracting some further tentative demand although the move does little to repair the damage of a share price decline of 78% over the last three years.