U.S.

Stocks scored a second consecutive month of solid gains, helping the S&P 500 Index continue the upward trajectory it has maintained with few interruptions since late October. The market’s advance was also notably broad, with an equal‑weighted version of the S&P 500 Index gaining 4.25% over the month versus 3.10% for its more familiar, market cap-weighted counterpart. The breadth was also reflected in the outperformance of mid‑ and small-caps and value shares.

The pivot away from the market leadership of the Magnificent Seven¹ mega-cap technology-oriented stocks was a theme of headlines in March, but investor enthusiasm over generative artificial intelligence (AI) seemed little diminished. Indeed, the market’s upturn for the month began in earnest on the morning of March 18, following news that Google parent Alphabet and Apple were in talks to use the former’s Gemini AI tool on the iPhone.

Bonds offered modest overall returns over the month, but credit-sensitive issues outperformed as investors embraced risk. High yield issues were particularly strong, and buyers easily absorbed strong levels of issuance.

Fed signals that rate cuts are still likely in 2024

Growing confidence that the Federal Reserve would cut interest rates later in the year despite mixed growth and inflation signals seemed to fuel much of March’s gains. Early in the month, stocks rose after Fed Chair Jerome Powell testified before Congress that policymakers were “not far” from having the confidence that inflation’s downtrend will be sustained, enabling them to begin cutting rates. Stocks gained further momentum following the Fed’s mid-month policy meeting, which revealed that policymakers still expected three rate cuts over the remainder of the year.

The news may have been a particular relief given an uptick in some inflation data. Early in the month, the U.S. Department of Labor (DOL) reported that core (less food and energy) prices increased 0.36% in February, slightly less than the previous month but above expectations. Equity investors appeared to take the upside surprise largely in stride, perhaps because it was due in part to a continued increase in shelter costs, generally considered a lagging indicator of overall inflation trends. The bond market’s reaction was more pronounced, with the yield on the benchmark 10-year Treasury note touching its highest intraday level (4.32%) since February 27.

Some signs of cooling in the labor market and elsewhere in the economy may have also reassured investors about inflation and interest rates. Early in the month, the DOL reported that the so-called quits rate—the share of workers leaving jobs voluntarily, typically considered a good measure of workers’ perception of the ease of finding a new job—fell to its lowest level since August 2020, early in the rebound from the pandemic’s onset. Several days later, the department revealed that the unemployment rate rose to 3.9% in February, its highest level in over two years.

Consumers pull back, but business spending picks up

The month’s biggest surprise might have been a slowdown in retail sales in February, including a 0.1% drop in online sales, marking a sharp deceleration from the 6.4% increase over the past 12 months. Meanwhile, various gauges indicated that the industrial side of the economy remained in contraction mode, although data on durable goods orders released late in the month suggested a rebound in capital investment.

Another question mark for the industrial economy arrived late in the month in the form of the collapse of the Francis Scott Key Bridge in the firm’s hometown of Baltimore, Maryland. The collapse cut off shipping access to the Port of Baltimore, one of the nation’s largest ports and its primary port for car and truck shipments. President Joe Biden pledged that federal aid to reopen the port would soon be coming, but the broader economic implications of the port shutdown remained uncertain as March came to an end.

Europe

The pan-European STOXX Europe 600 Index climbed to a record high as central banks signaled that they could cut interest rates in the coming months. Equity indexes in Germany, France, and the UK also rose sharply and surged in Italy.

ECB hints at policy easing

The European Central Bank (ECB) left its key deposit rate unchanged at a record 4.0% but hinted that it could start easing monetary policy in June. The central bank revised its inflation and economic growth forecasts lower and indicated that discussions about dialing back restrictive policy later in the year had begun. ECB President Christine Lagarde acknowledged that “good progress” has been made toward the 2.0% inflation target but said that the Governing Council still needed to be more confident that inflation was falling sustainably. “We will know a lot more in June,” she said, adding that there was broad agreement on that point.

Eurozone economy shows signs of stabilizing

Headline and core inflation, the latter of which excludes volatile food and energy prices, continued to slow in February, albeit by less than expected. Annual consumer price growth eased to 2.6%, while the core rate decelerated to 3.1%. Wage pressures—which the ECB monitors closely—continued to abate. Year‑over‑year growth in compensation per employee declined to 4.6% in the fourth quarter from 5.1% three months earlier.

Business activity picked up in March, according to S&P Global. Its preliminary reading for the eurozone composite purchasing managers’ index (PMI), which covers services and manufacturing, rose to a nine-month high of 49.9 from 49.2 in February. (PMI readings above 50 indicate an expansion in activity.) Business optimism in Germany measured by the Ifo Institute and ZEW Institute also strengthened on growing hopes of a rate cut.

BoE keeps rates on hold with dovish tilt

The Bank of England (BoE) kept its key interest rate unchanged at 5.25% for a fifth consecutive time, although the 8 to 1 vote in favor of this decision appeared to send a more dovish signal. Two previously hawkish policymakers dropped their calls to increase borrowing costs, while another backed an immediate cut. Governor Andrew Bailey said, “We are not yet at the point where we can cut interest rates, but things are moving in the right direction.” Later, Bailey told the Financial Times that rate cuts could be “in play” at future meetings.

UK inflation slows; GDP picks up from recession

Annual consumer price growth in the UK decelerated to 3.4% in February, the lowest inflation rate in more than two years. The economy showed signs that it may be recovering from a recession in the second half of 2023. Gross domestic product (GDP) increased 0.2% sequentially in January, bolstered by expansions in retailing and wholesaling.

SNB unexpectedly cuts rates; Norway’s central bank keeps its rate unchanged

The Swiss National Bank (SNB) reduced borrowing costs by a quarter of a percentage point to 1.5%—the first cut in nine years. The SNB said that it aimed to address lower inflationary pressure and appreciation in the Swiss franc. Norway’s central bank kept its policy rate unchanged at 4.5%.

Japan

Japanese stocks continued to make gains in March, with the MSCI Japan Index rising 4.3% in local currency terms. These gains were largely due to yen weakness resulting from the Bank of Japan’s (BoJ’s) unexpectedly hawkish tilt. (It raised short‑term interest rates earlier than had been priced in by most market participants and for the first time since 2007.) Exuberance around generative AI and solid corporate earnings also boosted sentiment.

BoJ ends negative interest rate policy

The BoJ made a much-anticipated policy shift and exited its negative interest rate policy. The central bank announced that it will set a policy rate target of 0.0% to 0.1%, up from -0.1%, following reports of major companies agreeing to robust pay increases in annual wage talks. The BoJ also ended its yield curve control program. However, Governor Kazuo Ueda affirmed that financial conditions would remain accommodative as inflation expectations were still below the 2% target.

Although market expectations appear to be converging around two more BoJ interest rate hikes within a one-year period, the yield on the 10-year Japanese government bond remained largely range-bound, finishing March at 0.72%, broadly on the same level as at the end of February.

Yen hovers around 34-year low, raising prospect of currency intervention

The yen depreciated to its weakest level over the month in about 34 years, to JPY 151.7 against the U.S. dollar, from the high‑JPY 149.9 range. The Japanese currency briefly hovered near JPY 152 against the greenback—which is perceived by many as a point that could trigger authorities to intervene in the foreign exchange markets to prop up the yen. The country’s three main monetary authorities suggested toward the end of March that they could be ready to stage such an intervention, in the strongest hint to date. Japanese stock markets have been significantly boosted by historic yen weakness over the past three years, as it has provided a boost to many of Japan’s large‑cap exporters, which derive a significant share of their earnings from overseas.

Revised report shows Japan avoided recession

Ueda gave a relatively downcast view of the country’s prospects, stating that while the economy is recovering moderately, weakness has been seen in some data. However, revised economic growth figures showed that Japan had in fact averted a technical recession (marked by two successive quarters of negative growth) in the final quarter of last year. Gross domestic product in the fourth quarter of 2023 expanded 0.1% on the quarter compared with the earlier release suggesting the economy had contracted 0.1%. On an annualized basis, this equated to a 0.4% expansion versus a prior fall of 0.4%.

Consumer prices pick up; services segment continues to drive private sector growth

Inflation, as measured by the consumer price index (CPI), rose to a higher‑than‑anticipated 2.8%, annualized, over the month of February. This was a sharp pickup from January’s 2.0% and well ahead of the BoJ’s inflation target. Meanwhile, the latest PMI data showed that activity within Japan’s private sector expanded in March at the fastest rate in seven months. Much of this is attributable to the strength of the services segment.

China

Chinese equities were mixed as concerns about the property sector slump offset signs that the economic recovery may be gaining traction. The MSCI China Index gained 0.95%, while the China A Onshore Index declined 0.23%, both in U.S. dollar terms.

China’s yearslong property crisis showed no sign of a turnaround despite the government’s efforts to bolster the sector. New home prices fell 0.3% in February, the eighth straight month of declines, according to the statistics bureau. A separate report showed that property investment fell 9% in the combined January and February period from a year earlier, slowing from December’s 24% drop. In corporate news, Moody’s and Fitch Ratings downgraded their credit rating for China Vanke, one of the country’s biggest developers, to junk, with Moody’s warning that all of Vanke’s ratings are on review for further reductions.

Industrial production picks up

Other data indicated a pickup in economic activity, however. Industrial production rose an above-forecast 7% in January and February from a year earlier, up from December’s 6.8%. Fixed asset investment grew 4.2% in the first two months of the year from the prior-year period, up from 3% in December, amid infrastructure growth. Retail sales rose more than expected over the two-month period as consumption surged during the Lunar New Year holiday.

Deflationary pressures continued to weigh on China’s economy. The consumer price index rose an above-consensus 0.7% in February from the prior-year period, reversing January’s 0.8% decline and marking the first positive reading since August. However, the producer price index fell 2.7% from a year ago, accelerating from January’s 2.5% drop and marking the 17th monthly decline, the longest streak of declines since 2016.

Beijing set an annual economic growth target of around 5% at the National People’s Congress, China’s parliament. The growth target was unchanged from 2023, when China’s economy officially rose 5.2%. The government set the budget deficit at around 3%, the same target as early last year, though it later raised it to 3.8% to accommodate more borrowing. It also said it would issue RMB 1 trillion in special ultra-long central government bonds to support growth.

Other Key Markets

Poland: Policymakers hold rates steady, cite “substantial uncertainty” about future inflation

Polish stocks, as measured by MSCI, returned 0.58% in March versus 2.52% for the MSCI Emerging Markets Index.

On March 6, the Polish central bank concluded its scheduled two-day monetary policy meeting and, as expected, decided to keep its key interest rate, the reference rate, at 5.75%. The central bank has kept the reference rate unchanged since early October 2023.

According to the post-meeting statement, policymakers acknowledged that “the process of disinflation” in the Polish economy is continuing, with inflation being “driven down by the reduction of cost pressures reflected in falling producer prices and by the weak growth in economic activity.” They also noted that fourth-quarter 2023 GDP growth measured at 1.0% was “relatively low” but that incoming data “indicate an increase in economic activity growth” in the first quarter of 2024. While policymakers projected that annual CPI growth “will run at the level consistent with” the central bank’s inflation target, they anticipated that “the decline in core inflation will be slower and core inflation will remain above CPI inflation.” As a result, policymakers decided to keep interest rates unchanged.

Central bank officials justified their decision by noting that inflation developments in future quarters are “associated with substantial uncertainty, related in particular to the impact of fiscal and regulatory policies on price developments, as well as the pace of economic recovery…and labor market conditions.” They also cited other factors, such as the potential for higher value‑added taxes on food products, higher energy costs, and “medium-term demand pressure in the economy…stimulated by wage growth.”

Hungary: Central bank slows pace of rate cuts amid “increasing financial market risk aversion”

Stocks in Hungary, as measured by MSCI, returned -2.89% in March versus 2.52% for the MSCI Emerging Markets Index.

Near the end of the month, the National Bank of Hungary (NBH) held its regularly scheduled meeting and reduced its main policy rate, the base rate, from 9.00% to 8.25%. The NBH also reduced the overnight collateralized lending rate—the upper limit of an interest rate “corridor” for the base rate—from 10.00% to 9.25%. In addition, the central bank lowered the overnight deposit rate, which is the lower limit of that corridor, from 8.00% to 7.25%. These 75-basis-point rate cuts, which were smaller than the central bank’s 100-basis-point rate reductions at the end of February, were widely expected.

According to the central bank’s post‑meeting statement, policymakers continued to characterize disinflation as being “strong and general in the Hungarian economy.” They also noted that the 3.7% annual consumer price inflation rate in February was within the central bank’s “tolerance band.” However, they anticipate that “the pace of price increases will temporarily rise…in the middle of this year” amid a tug of war between two opposing forces: “The weakening of the forint exchange rate in recent weeks points to a rise in imported inflation. On the other hand, the weaker cyclical position of the domestic real economy in the short term has a disinflationary impact.”

Nevertheless, policymakers justified their decision to reduce interest rates by repeating recent observations that disinflation has been “stronger than expected” in the past few months and that “external and domestic demand pressures have remained persistently low.” They specifically noted that “increasing financial market risk aversion justifies a slower pace” of rate cuts compared with what took place February.

As of 3/31/24