US economic data raises spirits

The PCE data was a key event for financial markets this week, as it is the Federal Reserve’s preferred inflation measure. The data came in line with expectations, rising by 0.3% on the month, with the headline rate falling to 3.4% in January, down from 2.6% in December. The core PCE deflator rose in line with expectations, it increased by 0.4% on the month and the annual rate decelerated to 2.8% down from 2.9%.

US stock indices have reacted positively to this news, and 2-year Treasury yields are lower by 6 basis points. However, there collective sigh of relief from financial markets that the PCE data did not come in stronger than expected, is masking the evidence that shows the disinflation trend is slowing down, which could keep the Fed on pause for some time.

Personal income gains could drive US stock prices higher

We mentioned in our earlier note that monthly inflation data is worth watching. European monthly inflation readings jumped in February, suggesting that there is inflation pressure coming down the pipeline, and the same may be true in the US. The 0.4% monthly increase in the core PCE is the highest monthly reading for 1 year, which does not seem compatible with rate cuts from the Federal Reserve. Added to this, personal income also rose by 1% in January, the highest level of growth for 12 months. There is a link between personal income/ wages and core inflation, since wage growth can feed into service sector inflation. Due to this, there is nothing in this report that will fill the Fed with ease about the future trajectory of inflation, even if personal spending declined in January.

The focus on the core PCE deflator is an interesting choice for the market, since it is less timely than the CPI and PPI reports, and we largely know what to expect in advance of its release. Due to this, we think that the market will quickly move on from this PCE data and focus on the next major macro events next week: the ECB meeting and the US non-farm payrolls report.

US stocks remain resilient

Plenty of Fed speakers this week have said that they remain data driven and the path to inflation returning to the Fed’s 2% inflation target will be bumpy. This means that data is likely to remain a key event for financial markets, and data releases could drive volatility in financial markets in the coming weeks. For now, the market still expects the first US rate cut to come in June. These expectations have barely shifted in the last month, however, the prospect of higher for longer has not hurt the stock market rally. The S&P 500 has risen by 4.62% in February, and the Nasdaq is higher by 5.17%. The best performing stocks in the US over the past month include Constellation energy, Ralph Lauren and Nvidia. This suggests that higher interest rates are not necessarily having a negative impact on consumer discretionary or other stock market sectors, which suggests that US stock markets remain resilient. Added to this, rising real incomes could continue to support stocks going forward and data released on Thursday suggest that fears about a slowdown in consumption could be overdone.

Elsewhere, German inflation for February was confirmed to have increased by 0.6% this month and fallen to 2.7% from 3.1% in January.

Takeover news drives FTSE 100  

The FTSE 100 was one of the weakest global performers in the past month, rising by a mere 0.3%, only the Ibex and the Swiss market performed worse in February.

However, the FTSE 100 is rising on Thursday as it gets a boost from some takeover news. Wincanton, the logistics company, is up more than 21%, after US firm GXO outbid rivals in the quest for the UK company.

IAG gains fade

IAG, the owner of British Airways, may have recorded a record profit, however, its share price has turned lower this afternoon and is now down nearly 1%. IAG reported earnings that were above pre-pandemic levels with profit after tax coming in at EUR 504mn, up from EUR 232mn a year earlier. Flying capacity is also expected to grow by 7% so far this year in time for the busy summer season.

The IAG share price initially focused on these good numbers, however, as we progress throughout the UK trading session, the market is instead focusing on the fact that IAG will not pay a dividend and it did not forecast that a dividend could be paid in the future, instead saying that any future dividends will depend on the liquidity position of the firm. IAG also sounded a warning on the prospects for trans-Atlantic travel, which it said had been hurt by the Israel-Hamas conflict, and that capacity to the lucrative US market would not grow by as much this year. For the IAG share price, this earnings report did not add up.