Portfolio Update – February 2024

In December, I stated that this year, all attention would be focused on rate cuts, particularly on their timing and magnitude. Well, thus far, this prediction has indeed materialized, with the FX market essentially mirroring the market’s anticipation of such cuts. Any and every data is interpreted as hawkish or dovish, and the price reaction is just a function of the pricing shift happening once the numbers are known.

On the other hand, equities seem less swayed by economic data at the moment; however, to suggest that equities are disregarding macroeconomic factors would be inaccurate. Rather, while Short-Term Interest Rates (STIR) and FX markets are predominantly influenced by macroeconomic trends and monetary policy decisions, equities are primarily driven by earnings, which are influenced by a combination of growth and idiosyncratic characteristics. As long as economic growth remains positive and financial conditions stay accomodative, there is little reason for equities to adopt a pessimistic outlook, particularly considering the continued strong performance of corporate earnings.

Before diving into the detailed analysis of individual countries, let’s first glance at the performance of currencies thus far. The chart below utilizes internal trade-weighted currency indices, which may slightly differ from those available elsewhere due to their calculation method. Nevertheless, they offer a convenient snapshot for quick reference.

United States

The US economy continues to demonstrate remarkable resilience, with the latest Q1 GDP estimate from the Atlanta Fed pegging it at 2.1% annualized. Despite initial concerns about shipping issues, improved weather conditions compared to January have prevailed, leading to enhanced supplier delivery times. This, in turn, has facilitated increased production across various sectors. Furthermore, after a prolonged period of inventory reduction aimed at cost-cutting measures, factories are now actively replenishing their warehouse stocks, driving up demand for raw materials and fostering production growth at levels not seen since early 2022. Additionally, there are indications of heightened consumer demand for goods, partly attributed to signs of alleviation in the cost of living crisis.

While there is a consensus expectation for growth to taper off in the coming months, and I am inclined to agree with this viewpoint to some extent, it is unlikely that growth will turn negative in the near future. Indeed, businesses are investing in both personnel and equipment, setting the stage for further production increases in the months ahead.

Regarding inflation, we began the month with the annual seasonal adjustment for CPI, which garnered the attention of traders following the notable revisions observed in 2022. However, it’s fair to say that these revisions turned out to be quite inconsequential: the headline December CPI was revised downward to 0.2% from 0.3%, while both November and October figures were slightly adjusted upwards to 0.2% and 0.1%, respectively. Core metrics remained unchanged for all three months, keeping the Q4 Core CPI steady at an annualized rate of 3.3%. Likewise, the 6-month Core CPI annualized remained unchanged at 3.2%.

The following week, the January inflation report exceeded expectations across the board, leading to a delay in market expectations for rate cuts. In fact, the hot report, combined with a strong January jobs report, indicates that the Fed’s journey to reach its 2% inflation target is likely to encounter challenges in the final stretch, which may prove to be the toughest phase yet. Then, the PPI data also showed significant increases, driven by a 0.6% surge in service prices, while goods experienced a slight decrease of 0.2%.

Do you recall last year’s discussions about raising the inflation target from 2% to 3%? The rationale behind such talks was not purely economic; rather, it stemmed from the realization that bringing inflation lower than 3% would have been much harder than it was to get there in the first place.

Anyway, turning to the PCE data, which is of utmost concern to the Fed, it largely aligned with expectations for both headline and Core figures. However, despite the uptick in monthly growth rates meeting expectations, the moderation in the yearly change figures is a positive development in the Fed’s battle against inflation. Nevertheless, there are a few causes for concern: the SuperCore PCE accelerated to 0.6% from 0.3% MoM, and the Core PCE annualized rate for the past quarter rose to 2.8% from 2%, and to 2.6% from 2.2% if we instead look at the past semester annualized.

In any case, January data is inherently hard to interpret due to seasonality effects, so it’s likely that these reports will have little impact on the Fed’s current decision-making process. Also, despite the bump, the overall disinflationary trend is still intact. Therefore, although certainly weaker, the case for rate cuts due to high real FFR still holds.

Turning to the labor market, it continues to exhibit strength. Initial claims hover around the 200k mark, with continuing claims remaining elevated since January. However, the 4-week claim average doesn’t raise any red flags, and the unemployment rate remains steady at 3.7%. If a weak labor market is a hallmark of a looming recession, it seems unlikely that one is on the horizon.

Federal Reserve

February did not host a FOMC meeting, but the minutes from the previous one were released, confirming that most policymakers were mindful of the dangers of easing monetary policy too rapidly, although a couple highlighted the downside risks associated with maintaining an overly restrictive stance for an extended period.

Regarding inflation, the minutes observed that while the risks to achieving the dual-mandate goals were more balanced, officials remained “highly attentive” to inflationary risks. There is some hesitancy to lower the FFR until they possess greater confidence that inflation is steadily moving towards the 2% target, and some even cautioned that progress on inflation could falter, a concern echoed by this month’s data.

Regarding the balance sheet, the minutes indicated that the decline in overnight RRP usage signaled that it might soon be appropriate to commence detailed discussions on the balance sheet at the upcoming meeting.

Overall, the Fed finds itself in a favorable position, buoyed by the robustness of the labor market and strong spending data, affording them the opportunity to maintain interest rates at current levels while they gather further evidence of inflation’s sustainable path back to target. In other words, as previously mentioned in my December Portfolio Update, there’s no reason to hurry: should inflation persist above the target, we can expect the maintenance of a restrictive stance for an extended period; conversely, if inflation remains within target, gradual rate cuts can be expected, possibly accelerated if growth risks materialize.

From a market standpoint, the resilience of economic data has been thoroughly absorbed. Currently, the market is pricing in three 25bps cuts starting in June, mirroring the Fed’s guidance in the SEP. There’s little reason to expect additional rate cuts at this point, and the likelihood of a rate cut before June is low. Essentially, the USD is trading at a fair value, with limited potential for significant price fluctuations in the near term.


Earlier this month, EU foreign ministers convened and approved the deployment of an EU naval mission to safeguard shipping from Houthi militants in the Red Sea. It’s noteworthy that, unlike the operations undertaken by other countries, the EU’s objective is purely defensive rather than offensive. Indeed, EU foreign policy chief Josep Borrel emphasized in a statement that the EU’s action is geared towards “restoring maritime security and ensuring freedom of navigation in a highly strategic maritime corridor.”

My interest in the situation in the Red Sea extends beyond its geopolitical implications: I’m more interested in the potential repercussions on inflation. Not only have the attacks led to shipping disruptions and escalated costs, but the expenses of shipping routes between Asia and Europe have also more than double. This is worrisome considering the extent to which the European economy relies on imports.

There are two risk scenarios associated with the soaring freight costs:

  • Higher freight expenses push inflation upwards without significantly impacting the economy or markets: in this scenario, rate cuts would likely be deferred until the third quarter at the earliest;
  • Elevated freight costs drive inflation upwards, resulting in harm to the European economy: in this case, rate cuts would still occur later than current expectations, but sooner than in the first scenario owing to the economic slowdown.

Taking a look at the broader economic landscape, there seems to be a glimmer of hope for the eurozone. Indeed, industrial production surpassed market expectations in December, with a notable 2.6& MoM increase: this follows a 0.4% rise in November, and defied predictions of a 0.2% decline. While part of this growth can be attributed to a surge in Irish production, it still represents positive data. Additionally, the Eurozone’s GDP growth for Q4 was confirmed at 0%, thus averting a technical recession. Furthermore, the disinflationary trend continued: headline HICP went from 2.8% to 2.6% whilst the core metric fell from 3.6% to 3.3%.

However, the main concern lies with the bloc’s largest economy, Germany, which is acting as a drag on overall economic growth. The German economy contracted by 0.3% in the fourth quarter, with government consumption sharply declining due to budget constraints, and gross fixed capital formation shrinking as companies reduce investment. On a positive note, the German government has acknowledged this issue and revised its economic growth forecast for the year down to 0.2% from 1.3%. However, it attributed this adjustment to weaker global demand, geopolitical uncertainty, and higher inflation, rather than acknowledging the self-inflicted damage incurred over the past two years.

Shifting our attention to the labor market, evaluating the current landscape proves to be quite challenging. Despite the unemployment rate remaining at historic lows, there’s a discernible pattern of employers downsizing their workforce. However, they appear to be quite cautious about implementing drastic measures in this regard: consequently, while individuals may not anticipate a particularly bright future, neither are businesses preparing for a downturn. It’s more of a waiting game, with companies maintaining their operations and remaining ready to rebound once signs of improvement emerge. Another perspective on this situation is that we are essentially returning to a more typical state of affairs by shedding the excesses of 2020-2021, much like the situation in the United States.

European Central Bank

In February, there was no ECB meeting, but the minutes of the previous one were released. Given that the meeting itself wasn’t particularly noteworthy, it wasn’t surprising that the minutes didn’t reveal anything groundbreaking. Essentially, they reiterated what had already been conveyed during the press conference.

It was noted that there had been further progress on all aspects of the reaction function, instilling confidence that monetary policy was effective. However, it was also emphasized that more progress was necessary in the disinflationary process before the Governing Council could be sufficiently assured that inflation would reach the target in a timely and sustainable manner.

Indeed, while significant strides have been made in fighting inflation, caution and patience are still warranted, as the disinflationary process remains delicate and acting prematurely could potentially reverse some of the progress achieved. In essence, the perceived risk of lowering policy rates too soon still outweighs that of doing so too late. Considering the data released this month, I’m adjusting my base case scenario to anticipate rate cuts in June, rather than April as previously thought.

Finally, next week, on Thursday, there’s another ECB meeting scheduled, and the consensus is for the bank to maintain interest rates, with the market indicating a 94% probability of this outcome. Based on statements from ECB officials, I expect to hear something akin to “we’re awaiting the April wage data”, which will be available after the April meeting.


In Japan, the progress observed in the private sector during January largely faded away in February, resulting in stagnation in overall business activity and a subsequent decrease in optimism for the future. While the services sector sustained its growth trajectory, this was offset by a notable decline in the manufacturing sector. This pattern is evident in employment statistics as well, where there was a significant acceleration in hiring, primarily led by the service sector, while manufacturing firms reported the most pronounced reduction in workforce numbers seen in over three years.

Also, the country unexpectedly fell into technical recession in the last quarter of 2023, with GDP contracting by 0.4% on an annualized basis, following a 3.3% decline in the previous quarter.

However, amidst the challenging economic landscape, there are some positive developments to note as well. Core machinery orders rose by a seasonally adjusted 2.7% in December, indicating a favorable trend in investment. Additionally, Japanese export data surged to a record high in January, with a notable 11.9% increase, marking the second consecutive month of growth: this expansion in exports alleviates concerns regarding slowing global demand. Moreover, with lower energy imports factored in, Japan’s trade deficit contracted to approximately half of its previous year’s level.

Regarding inflation, the January figures surpassed expectations, with the headline rate decreasing from 2.6% to 2.2%, and the core rate dropping from 2.3% to 2.0%. This indicates that inflation continues to exceed the BoJ’s target, justifying the expectations for a rate hike in the first half of the year. As outlined in my December Portfolio Update, my base case is for a 10bps hike during the April meeting, following March’s wage negotiations: currently, the market gives 80% probability of this outcome.

Talking about the JPY specifically, we’re once again at the “intervention zone”, with USDJPY back above 150 and EURJPY hovering around 163. The MoF said it is closely watching FX market moves with a strong sense of urgency, but when asked refused to give any insights on either the level required for an intervention nor its timing. The currency diplomat Kanda also noted he is watching the moves with a high sense of urgency and will take appropriate action if needed on FX, noting rapid FX moves could have an adverse impact on the economy. Overall, it’s almost like we’re back to Autumn 2023.

In any case, despite the fluctuations observed this year, I maintain my bullish bias on the yen. While I don’t expect any significant developments until April, I want to emphasize that while many central banks may opt to cut rates, the BoJ is likely to pursue the opposite path by hiking rates instead: this divergence alone is enough to make the yen appreciate against other currencies.

United Kingdom

The United Kingdom, much like Japan, has entered a technical recession. However, similar to Japan, we should only be concerned about this development if the technical recession translates into an actual recession, which doesn’t appear to be the case thus far. Governor Bailey stated that he wouldn’t place too much emphasis on whether the UK enters a technical recession, as they are beginning to observe signs of a recovery. Indeed, this month saw the composite PMI output index rise to 53.3, coupled with a significant improvement in customer demand.

New Zealand

In February, despite the market pricing in a 30% probability of a hike and some calls for a potentially hawkish surprise, the RBNZ chose to keep the OCR unchanged at 5.50%. They noted that the rate needs to remain at a restrictive level for a sustained period and expressed confidence that the current level is effectively curbing demand. Furthermore, during the press conference, Governor Orr mentioned that while they did discuss a hike, there was a strong consensus that the current rate was adequate.

The key takeaway from the meeting proved to be the projections for the OCR, which were quite dovish as the central bank reduced the forecast for June 2024 from 5.67% to 5.59% and for March 2025 from 5.56% to 5.47%, indicating a very low chance of a hike. The reason for this shift can be attributed to the fact that the RBNZ stated core inflation and most measures of inflation expectations have declined, and the risks to the inflation outlook have become more balanced.

In any case, given the content of the meeting and the forecasts, my view is generally bullish on NZD due to the attractive carry.


The RBA has maintained interest rates at 4.35%, as widely anticipated, keeping an hawkish stance. Indeed, the Board reaffirmed its commitment to bringing inflation back to target, suggesting that further hikes should not be out of the question. However, I have to say the likelihood of a rate increase appears quite slim unless there is a notable deterioration in inflation data, and it shouldn’t come as a surprise that the markets are pricing in two cuts later this year.

Similar to its counterparts, the RBA not only stressed the need for inflation to come back to target, but also the importance of being assured that inflation is sustainably moving towards the target range, acknowledging that inflation still impacts real incomes and, consequently, household consumption.

More interestingly, in its quarterly Statement of Monetary Policy, the RBA has revised down its forecasts for both inflation and GDP, highlighting balanced risks to the outlook, and noting that demand levels exceed the economy’s supply capacity leading to price pressures. Should forthcoming data suggest a different trajectory, it could present an excellent opportunity to purchase AUD: even the mere idea of a potential hike would make for a strong bull case for the currency.

During the press conference, Governor Bullock largely maintained a hawkish tone, cautioning against further divergence in inflation expectations. She emphasized the RBA’s neutral stance on policy decisions while suggesting that rate cuts might be considered if consumption slows more abruptly than anticipated—not necessarily contingent on inflation returning to target. However, this observation isn’t groundbreaking, as rate cuts typically serve two purposes: to prevent economic slowdown and to mitigate ongoing slowdowns.

In the minutes, released two weeks after the meeting, we found out that the Board did actually consider the possibility of a 25bps hike, but ultimately concluded that, given the balanced risks to the outlook, maintaining current interest rates was more appropriate. Overall, despite the somewhat hawkish tone, the minutes did not indicate an immediate need for action, and acknowledged the recent weak labor market and consumer spending data.


As of March 1st, 2024, I am currently short on EURJPY, and my intention is to further increase my exposure to the long yen position over the upcoming sessions.