Highlights:
- CNB cuts rates from 6.75% to 6.25%!
- Inflation in the Czech Republic for January finally within the CNB’s tolerance band (2.3%)
- US real estate and banking sector problems?
12-month change in selected indices
Comment:
The CNB cut interest rates again and more sharply from 6.75% to 6.25%. Further interest rate cuts are expected and rates could get as low as 4% by the end of 2024.
Stocks continued to reach new highs in February, with the S&P 500 index (5.31%) and European stocks (2.17%). Even Chinese stocks started to do well, gaining a full 7.42% for February! This was due to the announced stock market support from the Chinese government. The CCP proposed several measures to support and restore confidence in the Chinese stock market. One of the measures is that CCP itself could eventually buy Chinese stocks on the stock market to support their growth.
However, there are more and more interviews and articles claiming that we are in a stock bubble, the world is facing a major crisis and everything is about to crash. The reason for the stock bubble is probably the hype around artificial intelligence and also the growth of the biggest technology stocks.
Probably the most we could have heard recently about NVIDIA stock, which has even become the 3rd largest company in the world. It may have rocketed in price by several hundred percent in the last 2 years, but on the other hand there is a fundamental behind it and that is the huge demand for its chips that are placed in datacenters and deliver the best possible performance for complex computing models. As a result, NVIDIA’s sales and profits are also growing at a very high rate year-on-year.
On the other hand, in recent months we have been hearing that house prices in the US are falling and banks are getting into trouble again. Specifically, it is office-oriented real estate and the banks that are getting into trouble with this are then financing this business. So it is a narrow segment of the market that has some problems so far.
US:
The year-on-year inflation rate for January in the US came in at 3.1%. This puts inflation above expectations (2.9%) and fails to bring it down into the inflation band. If we look at the adjusted inflation, the so-called Core CPI (excluding energy and food prices), which the Fed primarily tracks, it jumped even to 3.9%. What this means in effect is that if energy prices were not falling, then inflation would be even higher than the 3.1%.
Once again, the so-called Shelter (imputed rent), which shows the rise in rents and residential property prices in the US, is rising year-on-year and month-on-month. The S&P 500 index fell by 1-2% that day due to inflationary numbers, but returned to its upward trajectory in the following days.
The Fed continued its hawkish rhetoric in the wake of the inflation numbers and the first interest rate cut is not expected to take place until the May meeting at the earliest.
However, in recent months there have been further problems in the real estate sector, specifically in commercial real estate focused on office leasing. Building occupancy in this segment continues to decline and is unlikely to reach the pre-Covid levels. Companies and their employees have become accustomed to working from home and continue to use a combination of office and home office work.
Therefore, due to the larger decline in office property prices, REITs in particular are in trouble, but so are the banks that help finance their business. One example is New York Community Bank, whose stock is down 60 to 70% since the beginning of the year.
So far, it doesn’t look like the decline in office real estate is going to trigger a sell-off in the stock markets, but other problems caused by higher interest rates may be coming our way in the coming months.
Europe:
The annual inflation rate for the month of January in the European Union was 2.8%, sticking to a gradual downward trend. While the ECB has no reason to cut interest rates quickly yet, it is likely to do so in the coming months.
Also, the ECB left interest rates unchanged at its January meeting and thus intends to keep rates at this level for some time to come. The ECB is not yet predicting a cut in the coming months, but it could probably happen already this year, due to the economic growth kicking in again. It has stagnated around 0% in recent quarters, but GDP growth of around 1.5% is expected for 2024.
On the one hand, however, we have countries whose GDP has even grown in recent quarters, such as Poland and Portugal, and then there are countries whose GDP has fallen and are therefore in recession. For example, Germany, the Czech Republic and Austria.
However, European stocks represented by the DAX 40 or MSCI Europe index are gaining several % for February and reaching new highs, similar to the S&P 500 index.
CZECH REPUBLIC:
On 8 Feb 2024, the CNB decided to cut interest rates by 0.5% right away. The 2-week repo rate went from 6.75% to 6.25%. There was a majority consensus in the vote, with 6 out of 7 board members voting for a cut to 6.25% and one member even voting for a cut to 6%.
In mid-February, the inflation figures also came out, with the year-on-year change for January coming in at just 2.3%, and for the first time in almost 3 years we were back within the CNB’s tolerance band. It was partly expected that there might be some negative surprise and inflation might be higher, but this did not happen. So the CNB is forecasting inflation at a similar level in the coming months.
Inflation is now only between 2% and 3%, but it will certainly not give us back the depreciation and price rises that have occurred in recent years. For prices to start getting cheaper, deflation would have to set in, but the CNB will not allow that.
One of the reasons why inflation has got to the level it has then may be due to general consumer and business austerity and their reluctance to spend. This has been reflected in the fall in GDP, albeit by only 0.2% but at the beginning of 2023 the CNB predicted GDP growth of at least 1% and it ended up being a fall.
Meanwhile, for 2024, the CNB is forecasting moderate growth and a kick-start to the economy, but only by 0.6%, which is really lean growth. Given the accuracy of the CNB’s forecasts, it is possible that we may end up with a decline in GDP again or even more growth of, say, 1-2%. The economy will clearly benefit from further rate cuts and, so far, it looks like interest rates could be around 4% by the end of 2024.
In connection with this, house prices and especially bond prices, which are rising as a result of the interest rate cuts, are starting to rise again slightly.