Markets and Economy

What’s driving markets? Consumers, inflation, and central banks

Woman in mid 30s goes shopping for denim jeans in a clothing store.
Key takeaways
The US consumer
1

For December, retail sales were better than expected and initial jobless claims were at their lowest levels since September 2022.

China’s growth
2

China’s annual gross domestic product growth rose in the fourth quarter above policymakers’ target.

Central bankers
3

European Central Bank President Christine Lagarde and US Federal Reserve Governor Chris Waller threw cold water on those hoping for quick rate cuts. 

Every week is a mosaic of economic data and market data. Last week, we received insight into US retail sales and jobless claims, China’s gross domestic product (GDP) growth, UK and eurozone inflation, and central bank opinions. Here’s how these data points contribute to the bigger picture and help show what’s driving markets.

The US consumer is in good shape

For December, retail sales were better than expected and initial jobless claims were at their lowest levels since September 2022,1 both of which are good signs for the health of the US consumer. And we’re finally seeing signs that US consumers are feeling well themselves, with the University of Michigan reading of consumer sentiment at its highest level since July 2021.2 The improvement over the last two months has been very significant.

China sees improved but uneven growth

China’s annual GDP growth rose in the fourth quarter to an annualized rate of 5.2%, above policymakers’ 5% target but narrowly below the 5.3% consensus estimate.3 Policymakers are likely to set a 5% growth target for 2024, which now seems achievable without significant easing. In addition, we saw year-over-year increases in industrial production (6.8%), retail sales (7.4%), and fixed asset investment (3%).3

There’s concern that these better results could curtail any additional stimulus, but I doubt it. Word is that China is considering the issuance of special sovereign bonds, which has only happened three times before.4 I would anticipate targeted stimulus to areas like the property sector given that China’s property investment fell by 9.6% in 2023.3

Inflation looks well under control

Some inflation-related data has spooked markets, but the reality is that inflation remains well under control and is poised to ease further in developed countries:

  • UK. The UK’s December Consumer Price Index (CPI) was higher than expected (4.0% actual versus 3.8% year-over-year) and higher than its November reading of 3.9%.5 However, that was largely driven by higher tobacco and alcohol prices. Core CPI (excluding energy, food, alcohol, and tobacco) rose by 5.1% year-over-year, the same rate as in the previous month.5 In a separate report, though, wage growth (excluding bonuses) was reported at the weakest pace in nearly a year.6
  • Eurozone. We saw a similar pattern in the eurozone, where December’s inflation rate was 2.9% year-over-year, up from 2.4% in November.7 However, we have to remember it was 9.2% year-over-year just a year earlier.7 And inflation ex-food and energy was 3.9% year-over-year, down from 4.2% in the previous month.7

It’s also important to look at survey-based expectations of consumers. Consumer expectations have been predictive of future inflation as they affect the consumption decisions of households, turning expectations into self-fulfilling prophecies. As Federal Reserve Chair Jay Powell acknowledged, “Inflation expectations are terribly important. We spend a lot of time watching them.”8 And so recent results are encouraging:

  • US. US consumer inflation expectations for the year ahead, as measured by the University of Michigan Survey of Consumers, have fallen dramatically in the last several months, from 4.5% in November to 2.9% in January.9 In addition, the Atlanta Fed Business Inflation Expectations Survey showed that businesses expect inflation in the year ahead to decrease substantially, down to 2.2% — getting closer to the Fed’s inflation target.10
  • Eurozone. The European Central Bank’s (ECB) Consumer Expectations Survey showed that median consumer expectations for eurozone inflation for the next 12 months fell to 3.2% in November.11 This was down significantly from the October reading of 4.0% and is the lowest rate since February 2022.11

Japan is also seeing a decrease in inflation — although that’s not what it’s looking for. Japan’s year-over-year inflation rate was 2.6% in December versus 2.8% in November, with core inflation at 3.7% versus 3.8% in November.12 This helps confirm our expectation that that Bank of Japan will sit on its hands and not act at this week’s meeting.

Central bankers sound hawkish

ECB President Christine Lagarde said rate cuts likely won’t start until the summer, rather than the spring. And Fed Governor Chris Waller threw cold water on those hoping for a rate cut in March: “When the time is right to begin lowering rates, I believe it can and should be lowered methodically and carefully…I see no reason to move as quickly or cut as rapidly as in the past.”13

I think it’s important to point out that I haven’t expected a Fed rate cut in March — and I’ve expected the ECB to start cutting after the Fed begins. So nothing that’s been said changes my expectations for 2024. And, again, I have to stress that central bankers have an agenda in mind when they make these comments; they want to keep a lid on easing financial conditions.

A new record for the S&P 500 Index

Last week we saw the S&P 500 hit a new record closing high of 4839, breaking the record of 4796 set back on Jan. 3, 2022. But the correlation we have seen in the recent past between lower bond yields and higher stock prices was broken — at least temporarily. We saw significant volatility in bond markets last week — fueled by concerns that inflation is running hotter than expected, coupled with hawkish “central bank speak” — which sent yields higher.

For example, in response to the eurozone inflation print, euro bond yields rose significantly; the yield on the German 10-year rose from 2.18% to 2.34%.14 After the release of US retail sales data, US bond yields also rose materially. And bond yields were also pushed higher by hawkish central bank speak.

But that didn’t stop stocks from advancing. The catalyst was enthusiasm around the tech sector. It started in semiconductors, with very positive guidance from Taiwan Semiconductor, and spread to tech stocks in general. The drivers were excitement over the potential for better tech earnings as well as more excitement over the potential for artificial intelligence. That then led to more bullish sentiment overall and helped pull up stock prices in a variety of sectors.

Week ahead

The coming week will be filled with central bank decisions, from the Bank of Japan to the Bank of Canada to the ECB. And we’ll be looking to the most important inflation reading for the Fed, the Personal Consumption Expenditures report, to help foreshadow what we may hear from the Fed when it meets the following week.

But don’t lose sight of the forest for the trees. In my opinion, it doesn’t matter if we get some imperfect inflation data points, especially around headline inflation; disinflation is underway and will continue. In my opinion, it doesn’t matter whether the Fed starts cutting in March or May — it will cut and cut materially this year, and other major Western developed central banks will start to cut as well. I believe we’re headed for a bumpy but brief landing in the near term and then are likely to see a re-acceleration of economic growth later this year.

I still expect small caps and stocks outside the US, along with tech, to perform well in coming months — in addition to investment grade bonds — to name a few areas of opportunity. However, I believe it’s critical to be well diversified across and within the three major asset classes — stocks, bonds, and alternatives. This new year of investing has only just begun and is likely to offer some twists, turns and surprises along the way.

Dates to watch

Date

Report

What it tells us

Jan. 23

Bank of Japan rate decision and press conference

Reveals the latest decision on the path of interest rates.

 

ECB Bank Lending Survey

Provides information on the supply of and demand for loans to enterprises and households.

 

S&P Global Japan PMIs

Index Indicates the economic health of the manufacturing and services sectors.

Jan. 24

S&P Global eurozone PMIs

Indicates the economic health of the manufacturing and services sectors.

 

S&P Global UK PMIs

Indicates the economic health of the manufacturing and services sectors.

 

S&P Global US PMIs

Indicates the economic health of the manufacturing and services sectors.

 

Bank of Canada decision and press conference

Reveals the latest decision on the path of interest rates.

Jan. 25

German Ifo Business Climate Index

Assesses the current German business climate and measures expectations for the next six months.

 

ECB decision and press conference

Reveals the latest decision on the path of interest rates.

 

US Durable Goods Orders

Tracks new orders placed with manufacturers for long-lasting goods.

 

US GDP

Measures a region’s economic activity.

 

US New Home Sales

Indicates the health of the housing sector.

 

Bank of Japan monetary policy meeting minutes

Gives further insight into the central bank’s decision-making process.

 

UK GfK Consumer Confidence

Tracks UK consumers' views of their finances and the economy.

Jan. 26

US PCE Price Index

Tracks the path of inflation.

 

US Personal Spending

Measures changes in the value of spending by US consumers.

 

US Personal Income

Measures income that people get from wages and salaries, government benefits, dividends and interest, business ownership, and other sources. 

 

US Pending Home Sales  

Indicates the health of the housing sector.

 

US Crude Oil Inventories and Natural Gas

Helps indicate supply and demand for energy.

Footnotes

  • 1

    Source: CNBC, “Weekly jobless claims post lowest reading since September 2022,” Jan. 18, 2024

  • 2

    Source: University of Michigan Survey of Consumers (preliminary), Jan. 19, 2024

  • 3

    Source: China - Office of National Statistics, Jan. 17, 2024

  • 4

    Source: Bloomberg News, “Why China Is Considering Rarely Used Special Bonds to Stimulate Its Economy,” Jan. 21, 2024

  • 5

    Source: Consumer price inflation, UK - Office for National Statistics, Jan. 17, 2024

  • 6

    Source: UK wage growth slows again, offering some relief to BoE (Bank of England), Reuters, Jan. 16, 2024

  • 7

    Source: Eurostat, Jan. 17, 2024 

  • 8

    Source: Federal Open Market Committee Meeting Press Conference, Sept. 22, 2022

  • 9

    Source: University of Michigan Survey of Consumers (preliminary), Jan. 19, 2024

  • 10

    Source: Federal Reserve Bank of Atlanta, Business Inflation Expectations, January 2024

  • 11

    European Central Bank, Jan. 16, 2024

  • 12

    Source: Japan Ministry of Internal Affairs and Communications

  • 13

    Source: CNBC, “Fed’s Christopher Waller advocates moving ‘carefully’ with rate cuts,” Jan. 16, 2024

  • 14

    Source: Bloomberg, as of Jan. 19, 2024