Interest rate expectations shift to mid-year
In March, the equity markets largely continued their bullish trend from the previous months. However, market expectations of interest rate cuts by the central banks in the USA and the eurozone shifted to the middle of the year.
The German stock index DAX rose by 4.61% to a new record high. The broad European index Stoxx Europe 600 also performed well, rising by 3.65%. The US S&P 500 index also recorded growth of 3.14%. Hong Kong's Hang Seng Index, on the other hand, moved sideways with a gain of 0.18%. Overall, global equities, as measured by the MSCI World Index, rose by 3.12% - all index figures in euro terms.
The rise on the stock markets in the first quarter was driven by good or improving economic data, which turned out better than widely expected. This turned fears of recession into hopes that a soft landing was still possible in the major economic regions. For example, the US economy grew by 3.1% year-on-year in the fourth quarter of 2023, contrary to expectations. The US labour market reported robust figures with continued job growth (excluding agriculture) and a stable low unemployment rate.
In turn, the eurozone was able to grow by 0.1% year-on-year in the fourth quarter - also contrary to market expectations - and thus avoid a recession. The Purchasing Managers' Index for services reached 51.1 points in March, thus rising once again after February (50.2). This index is regarded as the most reliable economic barometer for the eurozone and suggests a modest economic recovery (values above 50 signal expansion). However, the index counterpart for the manufacturing sector fell to 45.7 points (previous month: 46.5), indicating that the eurozone economy is still struggling with the effects of the key interest rate hikes and the rise in electricity and energy prices.
China has set itself a growth target of 5% for 2024. However, this target will be more difficult to achieve than in 2023 because the previous year, 2022, still suffered greatly from the consequences of China's zero-covid strategy. The Chinese government has therefore provided a fiscal stimulus. The increased spending is to be channelled into infrastructure measures on the one hand and strategic key areas such as "industries of the future" on the other. The aim is to reduce dependence on Western technologies.
Another key factor behind the strong share performance was the boom in artificial intelligence, which on the other hand was reflected in relatively low market breadth - the US stock market was driven by just a few companies in the first quarter. In March, however, the upward trend was additionally supported by strong energy and commodity stocks and, in Europe, by retail stocks and banks.
Expectations of interest rate cuts, which were still very high at the beginning of the year, have since shifted to the middle of the year. Especially as consumer prices in the USA rose again in February. Inflation was 3.2% compared to the previous year; in January it was 3.1%. Accordingly, the US Federal Reserve remained cautious and intends to wait for further data. In turn, the European Central Bank signalled in March that it might cut interest rates for the first time in June. In the eurozone, inflation fell to 2.6% year-on-year in February (January: 2.8%).
The shift in interest rate expectations led to different results on the bond markets. Yields on 10-year government bonds fell by 11 basis points in Germany and 5 basis points in the USA to 2.29% and 4.20% respectively. Hopes of an economic recovery benefited high-quality corporate bonds, whose yields fell in both the USA and Europe. In contrast, yields on high-yield European corporate bonds rose by 27 basis points to 7.56%. The price of gold rose by 9.08% to USD 2,229.87 per troy ounce.
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