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Germany Overtakes Japan

February 17, 2024
6 min read

Here are some of the biggest stories from last week:

  • US inflation slowed by less than expected in January.
  • Japan’s economy unexpectedly slipped into recession.
  • UK wage growth slowed by less than expected in the fourth quarter.
  • But inflation in Britain held steady last month, defying expectations for a slight uptick.
  • That wasn’t enough to prevent the UK economy from slipping into recession.
  • The world’s biggest digital currency surged above $50,000 for the first time since 2021.

Dig deeper into these stories in this week’s review.

US

Investors got a nasty shock this week after the latest US inflation report showed the annual pace of price gains slowed by less than expected in January, while a core measure accelerated on a monthly basis due to higher shelter costs. Consumer prices rose by 3.1% last month from a year ago, down from 3.4% in December but higher than the 2.9% forecast by economists. Core inflation, which strips out volatile food and energy items to give a better idea of underlying price pressures, stayed flat at 3.9%, defying expectations for a slowdown.

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US inflation slowed by less than expected last month. Source: CNBC

On a month-over-month basis, headline and core inflation both exceeded forecasts, coming in at 0.3% and 0.4%, respectively. The latter was particularly worrying as it marked an acceleration from December’s pace and was the highest reading in eight months, highlighting the sticky nature of underlying price pressures. That prompted traders to scale back their bets for rate cuts this year, sending US stocks and bonds sharply lower on Tuesday.

Japan

Across the Pacific, Japan’s economy unexpectedly slipped into a technical recession after shrinking by 0.4% on an annualized basis last quarter – far worse than the 1.4% growth predicted by economists. The contraction, mainly due to big falls in spending by households and businesses, followed a downwardly revised 3.3% annualized drop in the third quarter. The disappointing state of domestic demand will complicate matters for the Bank of Japan, which is considering existing its negative interest rate policy by raising borrowing costs for the first time since 2007.

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Japan's economy contracted for two consecutive quarters. Source: Bloomberg

The only bright spot in Japan’s growth numbers were exports, which surged in December due to increased sales of autos to the US and chip manufacturing gear to China. That helped drive a 2.6% jump in net exports in the last three months of 2023 from the previous ones, contributing 0.2 percentage points to quarterly economic growth. But Japan can’t keep depending on external demand to help offset poor domestic consumption, especially with some of its key trade partners expected to see growth decelerate this year. What’s more, the BoJ is widely expected to begin hiking interest rates this year – at a time when other major central banks will be lowering theirs. The divergence is predicted to strengthen the yen, which will make Japanese exports more expensive and, in turn, reduce their demand.

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Net exports contributed positively to overall growth (note that the GDP growth figures here are not annualized). Source: ING

For now, a weak yen and the unexpected recession meant some more bad news for Japan: it officially lost its title as the world’s third-biggest economy in dollar terms last year, passing the bronze medal to Germany. It’s no wonder the two are jostling over the same spot on the podium: they both have aging and shrinking populations, which is weighing heavily on all sorts of industries. Contrast that with India: the country’s population not only inched ahead of China’s last year, but it’s younger too. That’s why its economy is projected to surpass both Japan and Germany in size by 2027, securing its position as the third-biggest economy globally.

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India is expected to overtake Germany and Japan as the world's third-biggest economy by 2027. Source: Bloomberg

UK

Over in the UK, new data this week showed wage growth eased by less than expected in the fourth quarter. Average annual growth in regular earnings, excluding bonuses, was 6.2% in the three months to December. While that marked a fall from the 6.7% pace seen in the period through November, it was higher than the 6% forecast by economists, suggesting that the labor market isn’t cooling fast enough to satisfy policymakers worried about price pressures. The Bank of England is watching wages closely because it believes it’ll be harder to return inflation to its 2% target if pay rises rapidly and companies pass higher costs onto consumers. But the good news for Brits is that with wages now growing faster than prices for six consecutive months, households are enjoying a return of real spending power.

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Regular pay in the UK adjusted for inflation rose by 1.9% in the fourth quarter from a year earlier. Source: Bloomberg

But the BoE did get some good news this week, with the latest inflation report showing the pace of price gains holding steady last month, defying expectations for a slight uptick. Consumer prices rose by 4% last month from a year ago – less than the 4.1% forecast by the BoE and economists. And while services inflation, which is closely monitored by policymakers as a better measure of homegrown price pressures, accelerated to 6.5%, it was less than the 6.6% predicted by the BoE. The better-than-expected figures prompted traders to increase bets that the central bank will start cutting its benchmark rate, which stands at 5.25%, in the summer. Markets are now pricing in close to three quarter-point rate cuts by the BoE this year, up from nearly two before the inflation report.

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UK inflation held steady in January. Source: FT

Traders were given further ammunition to boost their bets on rate cuts this week, after new data showed the British economy slipped into recession at the end of last year. The UK economy shrunk by a bigger-than-expected 0.3% in the final three months of 2023 compared with the previous three months, with all the main sectors contributing to the fall. That poor showing followed a 0.1% decline in the third quarter, and meant that the British economy only grew by 0.1% during 2023 – the slowest annual expansion since 2009, excluding the first year of the pandemic. And the BoE anticipates that sluggish pace to continue, forecasting a measly 0.25% growth in the economy for 2024.

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The British economy entered a technical recession in the second half of 2024. Source: Bloomberg

Crypto

Bitcoin’s recent rally showed no sign of stopping, with the price of the world’s biggest cryptocurrency surging above $50,000 this week for the first time in over two years. That underscores a big change in appetite for the token after a series of crypto scandals and wipeouts had previously pushed many investors to shun the sector. The latest uptick has propelled bitcoin's gains for the year to over 15%, and is being fueled by several factors.

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Bitcoin surged above the $50,000 mark for the first time in over two years. Source: Bloomberg

First, the success of the recently approved US ETFs investing directly in bitcoin. The funds, which offer folk an easy way to gain exposure to the world’s biggest cryptocurrency through a regulated product, have attracted more than $9 billion in net inflows since their launch a month ago. That has more than offset the roughly $6 billion of outflows from Grayscale’s fund, which converted from a trust into an ETF but kept its 1.5% fee – more than a percentage point higher than the new market entrants.

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Bitcoin ETFs have raked in around $3 billion in net assets over the past month. Source: Bloomberg

Second, bitcoin is benefiting from growing attention on the so-called “halving" due in April. The event, which occurs approximately every four years, halves the reward miners receive for operating the powerful computers that verify transactions on the blockchain. This process is a part of bitcoin's monetary policy, designed to control supply inflation by decreasing the rate at which new bitcoins are created. Previous halving events have often led to big rallies in the crypto’s price, so you can understand why traders are getting excited.

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The price of bitcoin hit records after each of the last three halvings. Source: eToro

Third, appetite toward bitcoin and the wider crypto sector is on the rise amid growing expectations that central banks will lower interest rates this year, making risk assets more attractive to investors. Also helping sentiment is bitcoin's historically strong performance during the Chinese New Year, which took place earlier this month. The Year of the Dragon could breathe fire into bitcoin’s price, sure, but Chinese investors are probably motivated by more than mere superstition to gravitate toward the world's biggest crypto. After all, it could offer them a place to hide amid the country’s ongoing property crisis, weakening currency, falling bond yields, and slumping stock market.

Next week

  • Monday: Nothing major.
  • Tuesday: China one-year loan prime rate. Earnings: Walmart, Home Depot, Medtronic, Palo Alto Networks.
  • Wednesday: Japan trade balance (January), eurozone consumer confidence (February), minutes of the Fed’s latest meeting. Earnings: Nvidia, Rivian.
  • Thursday: Minutes of the ECB’s latest meeting, US existing home sales (January), Japan, eurozone, UK, and US PMIs (February). Earnings: Moderna, Block, Intuit.
  • Friday: China new homes price index (January).
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General Disclaimer

The information and data published in this research were prepared by the market research department of Darqube Ltd. Publications and reports of our research department are provided for information purposes only. Market data and figures are indicative and Darqube Ltd does not trade any financial instrument or offer investment recommendations and decision of any type. The information and analysis contained in this report has been prepared from sources that our research department believes to be objective, transparent and robust.

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