The US experienced strong economic activity in February, as evidenced by a robust labour market with significant job growth and solid wage increases. Although overall inflation is showing signs of cooling, super-core inflation is holding on rather stubbornly, which is not surprising given the resilient US economy. Consumer sentiment improved in February, underlining the positive consumer momentum. Due to the continued positive momentum, the Fed is unlikely to cut interest rates as quickly as expected in recent months. In the eurozone, economic sentiment has deteriorated slightly, while employment expectations have remained largely stable. Consumer sentiment has also improved slightly. There are major regional differences in the eurozone. The economic data for Germany points to a tense economic situation. Germany, Europe's largest economy, has significantly lowered its growth forecast and now only expects growth of 0.2% in 2024 compared to the previous forecast of 1.3%. A technical recession is expected in the first quarter of 2024. In France, Italy and Spain, however, the survey results for industry and the service sector rose surprisingly. Although the manufacturing sector is still not showing convincing traction. Geopolitical events such as the ongoing war in Ukraine and increasing tensions in the Middle East, which are affecting international trade, remain risk factors for the global economy. Japan unexpectedly slipped into recession in the final quarter of last year and was overtaken by Germany as the world's third largest economy. This downturn poses a challenge for the Bank of Japan to justify an interest rate hike. Prime Minister Fumio Kishida announced an economic stimulus package in December to provide households with relief against inflation-related price rises and to promote wage growth. In addition, investments are to be promoted in order to generate further growth and thus overcome the unfavorable demographic development. The declining inflation rate is still above the BOJ's target and the markets expect that the negative interest rate policy will also end in the last major economy in the summer.
February saw a positive trend in the stock markets with a sustained upturn in key indices. This reflects investors' growing acceptance of an economic recovery (especially in Europe) and positive earnings expectations. After a negative start to the year for the emerging markets (MSCI Emerging Markets -4.7% in January), the index, which mainly reflects the performance of the equity markets in China, India, Taiwan and South Korea, gained over 5%. The Chinese stabilization attempts, the continued good momentum of the Indian stock market and the strong gains in Taiwan and South Korea provided a tailwind (see FOCUS). Japanese equities remain the market leaders, followed by US tech stocks. The Nikkei225 reached a new all-time high after 35 years. The Tokyo Stock Exchange has set itself the goal of attracting foreign investors and revitalizing the Japanese stock market. Every month, it publishes a list of companies that announce plans to increase their capital efficiency ("naming and shaming"). The initiative is also intended to improve the valuation of Japanese companies. In the US, NVIDIA's quarterly results were convincing despite astronomically high expectations. The demand for AI-supported technologies is real and has picked up significantly since Microsoft announced its participation in OpenAI last year. To reduce dependency, Microsoft has now also announced a stake in Mistral AI, the French equivalent of OpenAI.
Solid US economic figures and somewhat more stubborn core inflation led to rising yields of around 25 basis points for ten-year maturities. The market-based 2-year implied US inflation expectation rose from 2.2% to almost 2.8%. Accordingly, key interest rate expectations have changed drastically in recent weeks. At the turn of the year, 7 interest rate cuts were expected for the current year; nine weeks later, there are just half as many. The interest rate landscape has also changed in Europe, with yields on ten-year government bonds rising by between 30 and 40 basis points - with the exception of Switzerland, where yields for the same maturities fell slightly to 0.78%. In China, the deflationary trend is continuing - yields reached a historic low of 2.5% in February.
The stock market continues to point to a constructive balancing act between growth, inflation and monetary policy and underpins the expected soft landing (a frictionless, slight downturn without negative effects). However, after the steep start to the year, temporary setbacks should not come as a surprise. We are taking this environment into account with a solid diversification. We are actively seizing opportunities in structural sectors such as the energy transition, technology and the capital goods boom. Investments in bonds, gold and alternatives provide additional diversification.