Market review

Market review

Weekly review 25 March 2024: US central bank sparked market euphoria

Last week saw rapid growth in the equity markets, led by the USA. European Purchasing Managers’ Indices suggested a stronger outlook for services while industrial figures continued on a downward trend.

The equity markets closed last week with a rally in response to the Fed’s positive interest rate announcement on Wednesday. The Fed announced that it is still planning three interest rate cuts for 2024, even though the inflation forecasts have slightly risen. In Europe, equity market growth was slightly more subdued, but the Helsinki stock exchange also closed the week in positive territory.

In addition to interest rate forecasts, the Fed also updated its inflation and economic growth projections in its meeting. Inflation is now expected to be 2.6 per cent at the end of the year, against the previous estimate of 2.4. The drivers behind the increase in prices include, for example, higher housing costs and a rise in fuel prices. The Fed’s message was that although inflation is still above the two per cent target level, there is no need for tighter monetary policy.

The decision was also influenced by the state of the labour market and general economic development: holding the interest rates steady or raising them could lead to a potential weakening of the situation for US consumers in a way that would have a significant impact on the state of the economy. Changes in the labour market often take place surprisingly quickly, and the Fed wants to avoid a situation where employment would weaken dramatically within a short period of time. The Fed also raised its projection of the US real GDP growth rate to 2.1 for 2024. At the start of the year, that figure was 1.4 per cent.

Another key expectation concerning the Fed’s meeting was related to the central bank’s programme to shrink its balance sheet, which has contributed to reducing liquidity in the markets. The Fed did not divulge any concrete plans concerning the continuation of the programme but promised to give more details soon.

In Japan, the central bank raised its key interest rate for the first time in 17 years. The Japanese key interest rate has been kept below zero, at -0.1 per cent, since 2016, and the current decision raises it to between 0.0 and 0.1 per cent. This hike is historic also in the sense that Japan was the last country in the world with a negative key interest rate.

PMIs show the difference between Europe and the USA

Last week, markets kept a close eye on Purchasing Managers’ Index data from Europe, the USA and China. PMIs consist of the results of surveys conducted among companies’ purchasing managers and reflect companies’ confidence in activity over the upcoming months. The indices provide insight into the economic outlook, and their different sub-components shed light on, for example, short-term price and employment prospects. When a PMI figure is above 50, activity is expected to improve and when it is below 50, activity is expected to weaken.

The PMI data from Europe published last week suggested that services are experiencing an upswing. In contrast, the industrial PMI was clearly below 50. The industrial sector looks very subdued in Europe and more specifically in Germany, where the index was as low as 41.6. In the USA, the situation was the opposite: the industrial PMI rose and the services PMI fell. Still, both indices are above 50 in the USA.

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