Market snapshot: recessions, recoveries and UK bank results season

US markets bounced back as the aftershock of a stubborn inflation print receded, led by the mega-cap technology stocks which had borne the brunt of Tuesday’s declines.

The latest inflation number in isolation showed a concerning move, but further readings will give a more balanced view. The fact remains that inflation is generally moving in the right direction and that bumps in the road will be inevitable. That being said, it remains to be seen whether the final leg of reducing inflation to the Federal Reserve’s target will be the hardest, particularly in light of other data which has suggested that the economy remains in growth mode.

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In terms of timing, the market consensus has now given up the ghost to any rate cuts in March, while the odds on a May reduction are also fading fast, currently leaving June in pole position. The Fed itself has suggested a potential three rate cuts this year, with the insurance of its remaining data dependent and therefore not tied to any cuts at all should the current economic strength persist.

Meanwhile, there was a return of buying interest in technology, with a rise in NVIDIA Corp (NASDAQ:NVDA) shares taking it past Alphabet Inc Class A (NASDAQ:GOOGL) in terms of market capitalisation, while also underlining the currently boundless enthusiasm for AI-related stocks. The US retail sales release later will provide further clues as to the strength of the consumer, a pivotal part of economic health, followed by a producer price report tomorrow. In the meantime, the main indices resumed their recent onward march, with the Dow Jones now up by 1.9%, the S&P 500 by 4.8% and the Nasdaq by 5.6% in the year to date.

Asian markets generally joined the relief rally emanating from the US, with the technology sector behind most of the gains. Japan’s Nikkei index continued its upward assault, edging nearer to its all-time high which was set in 1989, and despite confirmation that the economy had dipped into recession on the back of weaker domestic demand. Even so, a combination of a weaker currency, heightened international investor interest and changes to its corporate governance structure has made the region the preferred investment destination in the Asian region for the time being.

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As largely expected, the UK entered a technical recession at the end of last year, after the GDP print revealed a decline of 0.3% in the final quarter, larger than the expected 0.1% dip, and adding to the 0.1% drop from the previous quarter. However, the market impact was limited not only due to the better than expected inflation number yesterday, but also because some of the UK market’s recent lethargy has been based on anaemic or negative growth over recent months. In addition, the economy is estimated to have grown by 0.1% for the year as a whole. The indicator is also akin to driving in the rear-view mirror and as such does not indicate the current state of play. The GDP print for January is not due for release until March and the Bank of England has indicated that it expects the economy to pick up this year. In the meantime, the news also raises the possibility of interest rate cuts to bolster a struggling economy, although inflation including the impact of currently strong pay rises are complicating the central bank’s decision on timing, with no easing expected until June at the earliest.

In early exchanges, RELX (LSE:REL) and Centrica (LSE:CNA) shares both bounced on upbeat full-year numbers and accompanying comments, while there was also some broadly based interest among the retailers. Bargain hunting also lifted the more recently embattled Diageo (LSE:DGE), whose shares have declined by 19% over the last year, with a small drag coming from declines in Shell (LSE:SHEL) and Imperial Brands (LSE:IMB), both of which were marked ex-dividend today. The sprightly start for the main indices shaved some of the recent declines, although in the year to date the FTSE100 remains down by 1.7% and the FTSE 250 by 3.2%.

Tomorrow, NatWest Group (LSE:NWG) will kick off the UK banks’ full-year reporting season, with the recession announcement adding weight to the importance of credit impairments. The banks had previously been cautious on the outlook and had made loan loss provisions to anticipate any debt defaults, where at the last update there had been a small but containable rise in customer bad debts. As such, the general financial stability of the banks should see them through, while eyes will also be on Net Interest Margins, which had been a source of disappointment in recent quarters. At the same time, there are also expectations for larger profits alongside improved distributions to shareholders both in terms of share buybacks and dividend increases.