Economic Update - February 2024

US tech stocks tore it up in February with Nvidia and Meta reaching new highs. Meanwhile, the Chinese stock market found its inner dragon, Germany’s green economics is seeing red, and Australia ponders strong wage growth, falling iron ore prices, and Taylor Swift.   

What happened in Australia?

The RBA kept the cash rate unchanged in February, but its board minutes revealed that it had considered raising rates.

Maybe they should have raised rates, as the Wage Price Index jumped by its higher level since 2009 with a 4.2% increase in the December quarter on an annual basis (see chart below). The WPI has been increasing since December 2020 and unfortunately for the RBA has yet to show any real sign of slowing down.

On top of this, the RBA’s head of economic analysis said in a speech that, “services price inflation remains high and broadly based” and will only decline gradually.

The price of iron ore fell sharply over the month, which will weigh on Australian exports and growth. BHP was also impacted by the falling price of nickel.

House prices increased in January (see chart below) and retail turnover increased 1.1% (seasonally adjusted) after the 2.1% fall in December. So it appears the consumer, armed with increasing wages, still has some fight left in them. The stage 3 tax cuts will also come into effect in July which will put more cash in the average Australian’s pocket.

Economists are now pushing back a rate cut to Q3 with a Bloomberg survey of 32 economists showing a median interest rate cut of 25 bps.

What happened around the world?

USA

The US started the month with concerns over regional lender New York Community Bank and the commercial real estate market more generally. However, this was quickly overwhelmed by the performance of the top tech stops.

Nvidia’s and Meta’s Q4 earnings were higher than the market’s super-high expectations and this catapulted both stocks to the largest-ever one-day increases in market capitalisation (see chart below). Nvidia now has a higher market capitalisation than Amazon. With the growth of AI and its insatiable need for GPUs, Goldman Sachs called Nvidia, “... the most important stock on planet Earth”.

The bond market was forced to push back their expectations for a rate cut with inflation and the Fed’s preferred measure PCE (Personal Consumption Expenditure) both higher than expectations and higher than December's figures (see chart below for PCE). The Fed kept rates unchanged at the end of January.

January’s non-farm payroll also surprised on the upside and was accompanied by upward revisions for the second half of 2023. It turns out the US labour market is still running hot.

In a much-watched interview with 60 minutes, Fed Chair Jermo Powell pointed to the “danger of moving too fast when the job on inflation is not quite done”.

China

China began the month with stocks continuing their slide. Enter the dragon - the Chinese New Year Holiday saw a return to form for Chinese consumers with new records for train and plane travel (see chart below) and an expected 9 billion trips in total. The world hopes that this revival in Chinese consumer spending will not be short lived.