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Global equities did well in February, with several indices setting all-time highs despite forward-looking scenarios yo-yoing in response to economic news. Ultimately, equity investors plumped for a positive outlook on global growth. They seemed only moderately concerned over the stubbornly high level of services sector inflation.  

February’s Leap Day was dedicated to news on inflation. The message that came from the indicators was consistent on both sides of the Atlantic and reflects the concerns expressed by leading central bankers: It is still too early to be certain that inflation is ‘moving sustainably toward their 2% targets’.

Inflation – Be prepared for the last mile

Bond markets reacted well to the release of the flash estimate of inflation in the eurozone in February and to the January figure for US core PCE (personal consumption expenditures excluding food and energy deflator). On 29 February, long-term bond yields closed slightly below the previous day’s levels. Beyond possible end-of-month adjustments by investors, this was probably the result of the usual tussle between market economists’ expectations and the actual data.

While price indices in France and Spain exceeded expectations, German inflation came out in line with consensus. US consumer and producer price indices had prepared investors for a significant monthly rise in January for core PCE, the inflation measure favoured by the Federal Reserve. The actual core PCE index rose by 0.4% from the previous month, but year-on-year, it slowed from 2.9% to 2.8%.

In this context, the most vital information contained in these statistics appears to have been ignored: The cost of services is not slowing down. 

What’s new on economic growth?

Wage developments are the main factor behind services inflation, which reflects domestic demand momentum.

Last week, we devoted our weekly market update to the economic shape of the eurozone. The latest available data supports our analysis: Economic sentiment as measured by the European Commission survey fell in February, but the PMI (Purchasing managers index) probably saw its low last autumn. 

The average level of the composite PMI rose from 47.2 in the fourth quarter to 48.4 on average in January-February. The New orders index is signalling the softest falls in close to a year. A rebound in industrial production in December (+2.6% vs. November), driven by a sharp rise in investment goods was another encouraging element. An economic recovery, although moderate and fragile, is finally in sight in the eurozone.

In the US, there are signs of a moderate growth slowdown such as the decline in personal consumption in real terms in January and the drop in the manufacturing sector index. The Institute for Supply Management survey – a survey of purchasing managers – in February sent a more negative message than the PMI survey: the index fell to 47.8 from 49.1 in January. It has been below 50 for 16 months.

In the coming days, we will know whether the services sector ISM aligns with the decline in the PMI index. The Conference Board consumer confidence index fell in February after three consecutive rises. Households still consider that ‘jobs are plentiful’ (41.3% in February) rather than ‘hard to get’ (13.5%), but the gap between the two narrowed in February in line with a mild normalisation in the labour market.

Nevertheless, data so far shows that in the first quarter, US economic growth remains resilient (3.0% annualised according to the Fed of Atlanta’s GDPNow running GDP estimate).

More sensible expectations on monetary policy  

In February, major central banks managed to convince investors that they did not see an urgent need to start cutting their key rates.

In the US, market-based expectations gradually aligned with the US Federal Reserve’s forward guidance reaffirmed since the beginning of 2024: there is an exceptionally low probability of any policy action before June and policymakers expect a total of three 25bp rate cuts this year.

Government bonds suffered as a result of this alignment, but risk appetite has remained intact thanks to strong corporate fundamentals.

It’s time to agree on a scenario for 2024

With the recent improvement in eurozone business surveys and limited disappointment over US data, which are still reflecting a solid economy, the consensus is shifting towards a more optimistic view.

A likely recession, which was the central scenario a year ago, appears abandoned. In its interim report on the economic outlook, the OECD concluded that ‘recent economic indicators point to continued moderate global growth’.

February’s rise in equity markets fuelled favourable momentum on risky assets. While equities appear to be moving in an ideal world, there could be an upset at any time: Disappointing indicators would revive the recession scenario; sticky inflation would throttle expectations of a cut in key rates; concerns over real estate or China could re-emerge. Geopolitical and political risks have not receded.

In our view, the current setup does not seem conducive to significant directional positions in asset allocations. The risks mentioned above are not part of our central scenario, but could lead to spikes in volatility and nervousness across asset classes.

After the widespread deterioration in government bond yields in February, thresholds have been reached, or are about to be reached, which seem to us to justify gradually increasing our exposure. We remain close to neutral on equities, favouring those markets with more attractive valuations.