Focus was on the Bank of Japan this week as they met to discuss interest rate and monetary policy. As expected, they decided to keep their short term interest rate unchanged at 0%-1%. Whilst this was in line, it did not prevent the Japanese yen from falling further against the US dollar and currently trades at a level not seen since the 1990’s. In their quarterly outlook the Bank increased their inflation forecast for 2024 to 2.8%, up from January’s forecast of 2.4%. They also downgraded their economic forecast for the year to 0.8% from the previous expectation of 1.2%, blaming weaker private consumption.

Appearing dubious to hike interest rates further just yet or intervene in the currency market to halt the yen’s demise, the Bank of Japan is perhaps hoping for a little bit of help from the US Federal Reserve in the form of interest rate cuts. The latest inflation data from the US however might mean that isn’t a nailed on cert. Core PCE (personal consumption expenditures), which excludes the more volatile items of food and energy, and is the central banks preferred inflation measure, came in at 2.8% year on year to March. This was in line with the February reading but above the consensus forecast of 2.6%. Although it has undoubtedly fallen from its highs, it is starting to show signs of being ‘sticky’, as seen in other inflation measures.

Conversely, data referring to economic growth pointed towards a slower economy and perhaps does provide some scope for a rate cut. The latest purchasing manager indices signalled only a slight expansion in the private sector, with lower readings for both the services and manufacturing sectors, with the latter pointing towards contraction, despite a forecast for growth here.

We also saw the release of economic growth figures for the US economy for the first quarter of the year. This came in much weaker than expected. The consensus forecast had been for growth of 2.5% for the period, but instead we saw a figure of only 1.6%, down from the fourth quarter 2023 reading of 3.4%, which was admittedly strong. There was a slowdown in consumer spending which was driven by a fall in the consumption of goods. For now, the US Federal Reserve faces the potential challenge of stubborn inflation above target yet weaker growth when it comes to setting monetary policy.

Let us end on a high however, in a week which saw the FTSE 100 end at a record high. M&A was a feature of the market, with cybersecurity firm Darktrace being snapped up by a US private equity firm, whilst BHP bid for Anglo American, only to see it rejected. That does not mean BHP may be done just yet. There was also better than expected earnings data for NatWest. Perhaps equity market investors are reverting back to the company fundamentals, rather than the merry-go-round of economic data releases, where sometimes good news is good news, and sometimes good news is bad news!

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