Weekly Buzz: What's Moving Markets?

Global markets posted some big moves this week, and it all comes down to the outlook for inflation and interest rates.

Here’s what the markets are watching, and what will factor into the Fed’s next interest rate decision on 21-22 March:

Fed Chair Jerome Powell’s biannual Congressional testimony (7-8 March)

Investors have been looking for clues on the path of US interest rates and where the terminal rate could be. And let’s just say that Powell delivered. After he said that the Fed could take rates to a higher peak and return to a faster pace of hikes if the economic data stays hot, equity markets slumped and bond yields jumped.

Why it mattered: Investors hang onto Powell’s every word, and this time was no different. His signals on the rate path are a key factor influencing investor confidence or caution – especially given the high uncertainty over the economic outlook.

👀This brings us to the 2 data points to watch…

1. February jobs report (10 March)

Remember the hot jobs data back in January? February’s numbers should show whether those were a seasonal fluke or the start of a trend. Markets are currently expecting gains in nonfarm payrolls to slow to 224K from 517K in January.

Why it matters: A tight labour market pushes up inflation via higher wages, so the Fed’s been keeping a close eye on these dynamics. If the jobs market stays hot, the Fed may throw cold water on it by returning to larger rate hikes.

2. February Inflation (14 March)

Inflation has been on a downward trend since peaking in the middle of last year, but it’s still well above the Fed’s 2% target. Markets expect that the headline Consumer Price Index (CPI) will ease to a 6% year-on-year increase from January’s 6.4%. The month-on-month reading, which shows the momentum of price gains, is expected to edge down to 0.4% versus 0.5% in January – but that’s still double the average pace over the past 25 years.

Why it matters: Inflation has proven more stubborn than expected, and there’s a high degree of uncertainty over the path ahead. Investors and the Fed will focus on the “stickier” parts of inflation – or the goods and services where prices tend to change more slowly.

Meanwhile, China treads with caution

China's National People's Congress kicked off at the weekend, where policymakers set a conservative GDP growth target of 5% in 2023. That's lower than market expectations, and also lower than last year's target of 5.5% (which China didn't hit – 2022 growth came in at 3%).

What it could mean: This modest growth target highlights China’s cautious outlook and approach to stimulating its economy. And for the rest of the world, it means China may provide limited support for global growth. But despite its more modest outlook, we believe exposure to emerging markets like China is a key component of a globally diversified portfolio – especially given slowing growth in developed markets like the US.

🎓Jargon buster: China’s National People's Congress (NPC)

The National People's Congress (NPC), China’s highest legislative body, is dominating headlines right now. That’s because it has a massive sway in the country’s political, economic, and social fabric. Once a year, nearly 3,000 delegates elected from all over the country meet to:

• pass laws;
• approve budgets; and
• make decisions about the country’s direction.

It can also amend the constitution, elect or remove top government officials, and approve major government policies and initiatives.