Global RPI at 1 but rate cut hopes still dented

The global economy is performing much as expected. However, a Relative Performance Index of 1 masks a significant divergence between the major regions which, in the main, has left financial markets more cautious about the likely pace of central bank easing in 2024.

In the US, surprises in the economic data remained skewed to the upside leaving the RPI and RPI less prices (RPI-P) to close out last week at 22 and 16 respectively. Speculation about a rate cut from the Federal Reserve in March has now all but evaporated and investors have similarly ratcheted down further their expectations for a move in May.

The Eurozone economy remains very lethargic but no more so than forecast and at 15 and 31 respectively, the region’s RPI and RPI-P ended the week in positive surprise territory. Ahead of the ECB’s March 7th meeting, the latest readings will help to cement expectations for no move on key interest rates until later in the year.

In the UK, further signs that the current recession will be short-lived helped to lift both the RPI and RPI-P to 23. The surprising buoyancy of the economic reports so far this quarter makes a cut in Bank Rate next month all the more improbable.

In Japan, a slightly smaller than forecast January trade deficit did nothing to mask ongoing weakness in imports, itself due in part to inadequate domestic demand. In fact, with the RPI standing at minus 31 and the RPI-P at minus 39, the government felt obliged to revise down its own economic assessment for the first time in three months. Bank of Japan tightening in March remains unlikely.

There were no important data released out of China but a record cut in the central bank’s 5-year loan prime rate still reflected the unexpected weakness of local economic activity, as highlighted in an RPI of minus 21 and an RPI-P of minus 30.

In Canada, December strength in retail sales contrasted with a provisional January dip and especially with a much steeper-than-forecast drop in January inflation. The results left both the RPI (minus 19) and RPI-P (minus 6) below zero. Data surprises have been largely on the downside since mid-December and the Bank of Canada remains on course to be one of the first of the major central banks to cut in 2024, albeit probably not at their March 6th week.