Market Commentary 24th January 2023 from Charlie Hancock

UK economic data was mixed during the week. On the positive side, the Consumer Price Index (CPI) recorded a year-on-year increase of 10.5% during December, showing that the rate of inflation slowed from November’s 10.7%. Wage growth remained strong during November, with a year-on-year increase of 6.4%. With the labour market remaining tight and wages seeing relatively strong increases, the Bank of England (BoE) are likely to continue raising interest rates in the coming months.

The governor of the BoE, Andrew Bailey, stated during an interview that the UK is still likely to enter a long, shallow recession this year.

The President of the European Central Bank (ECB), Christine Lagarde, delivered a relatively hawkish message during the World Economic Forum event in Switzerland last week. Lagarde dismissed the prospect of a pause in interest rate hikes, stating that inflation is way too high and the central bank is determined to take action to return it to 2%. Minutes from the ECB’s December policy meeting showed that many of the voting members were in favour of raising interest rates by 0.75%, rather than the 0.50% hike which was delivered.

German Chancellor, Olaf Scholz, dismissed concerns around a recession in Germany during 2023, stating that he is “absolutely convinced this will not happen”. Scholz said that diversifying their energy supplies away from Russian gas has been critical to keep the economy going.

Investors paid close attention to earnings reports. So far during the US earnings season, corporations have generally posted robust results, however, many CEOs appear to have a relatively negative outlook for the coming months. Although revenues have continued to grow, many of the results show that profit margins are starting to come under pressure.

US economic data released last week pointed to slowing growth. The Producer Price Index (PPI), measuring output prices from suppliers across the US, showed that prices fell during December, with the decline being the sharpest since April 2020. The fall in prices suggested weakening demand for goods. Retail sales were significantly worse than expected in December, whilst industrial output also weakened.

Economic data for China was mixed. Retail sales and industrial output for December were significantly better than expected. Data on the property market was relatively gloomy, with new home prices falling for the 16^th consecutive month, suggesting that recent efforts to stimulate the market are not yet having the desired impact.

The demographics of China made the headlines last week, with data showing that China’s population shrank last year for the first time since 1960. The nation is likely to face similar pressures to Japan over the coming decades, with declining birth rates leading to a rapidly ageing population.

The Bank of Japan (BoJ) kept key interest rates and bond purchase measures unchanged at their policy meeting last week. Prior to the meeting, there was growing speculation that the central bank would change their policy measures as a result of rising inflation expectations. Japan’s Consumer Price Index (CPI) saw a year-on-year increase of 4% in December.

Whilst there are some signs that inflation may have peaked in the UK, the double digit increase in the year to December is unlikely to encourage the Bank of England (BoE) to halt interest rate hikes in the near future. Andrew Bailey did however suggest that the pace of rate hikes may slow in the coming months.

The ECB president pushed back against speculation that the central bank will slow the pace of interest rate hikes from 0.50% to 0.25%. In addition, minutes from their December policy meeting suggested that a 0.75% hike could be implemented following their upcoming February meeting.

GBP / EUR – Current 1.1419 Previous 1.1291

The Pound was in favour amongst currency traders, gaining 1.39% against the US Dollar and 1.13% against the Euro.