In the United Kingdom, the economy showed resilience at the start of the year, potentially influencing the Bank of England’s cautious stance on policy easing. Unemployment for the three months ending in November was lower than expected at 3.9%, and the January Purchasing Managers’ Index (PMI) for services exceeded estimates, indicating sector expansion for the third consecutive month. However, the UK economy officially entered a recession in the final quarter of the previous year. While inflation remained stable in January, there were expectations of interest rate cuts by the Bank of England as early as June. GDP contracted 0.3% in the three months through December, and services inflation rose to 6.5%. BoE Governor Andrew Bailey downplayed the significance of the GDP data, emphasising recent positive indicators but cautioned about high services inflation and the need for evidence of slowing wage growth.
In the eurozone, core government bond yields experienced a slight increase following a higher-than-expected U.S. inflation report. European Central Bank President Christine Lagarde expressed concerns about rushing into policy easing if inflation rebounds, leading to upward pressure on short-dated bond yields. Conversely, peripheral eurozone bond yields, particularly those of longer-dated Italian debt, declined.
The European Commission (EC) has cut its forecast for eurozone economic growth in 2024 to 0.8% from 1.2% previously forecast in November. This adjustment was attributed to inflation reducing purchasing power and higher interest rates limiting credit. The EC anticipated economic growth to pick up to 1.5% in 2025, slightly lower than the previous estimate of 1.6%. Additionally, the second GDP estimate confirmed economic stagnation in the eurozone in the fourth quarter of the previous year, following a 0.1% contraction in the preceding three months.
In the United States, the week brought significant economic surprises, notably in the services sector activity reading, which surged unexpectedly to a four-month high, indicating solid expansion. The Institute for Supply Management’s gauge also showed robust growth, although service prices surged to their highest level in nearly a year, contrasting with recent data showing falling prices for many manufacturing inputs. Additionally, the Labor Department revised its initial estimate of December consumer inflation slightly downward.
Treasury yields increased at the week’s start, influenced by a strong jobs report from the previous week and comments by Federal Reserve Chair Jerome Powell. Powell’s remarks, reiterating that immediate rate cuts were unnecessary, caused some concern, especially given the unexpectedly strong January payrolls report. Retail sales reported by the Commerce Department on Thursday plummeted in January, with some economists attributing the weakness to seasonal factors and harsh weather. However, sales in restaurants and bars increased. Initial jobless claims were below consensus while continuing claims were slightly above. Housing starts came in lower than expected, but a gauge of homebuilder confidence surprised on the upside.
The inflation data led investors to significantly lower their expectations for potential rate cuts. According to the CME FedWatch Tool, the futures market priced in only a 10.5% chance of a rate cut in March, compared with 65.1% a month earlier. The yield on the benchmark 10-year U.S. Treasury note surged to its highest level since December 1, reaching 4.33% on Friday.
