Market Commentary 8th January 2024 – from Charlie Hancock

Updates regarding the UK property market were widespread in the business press last week. Mortgage lender Halifax reported that the average house price rose by 1.7% in the year to December 2023, marking the first month where prices were higher year-on-year since the spring. The Halifax expect prices to decline by 4% in 2024. The number of mortgage approvals during November rose to the highest level seen for 5 months, however, they remain significantly below the long term average, suggesting housing market activity remains subdued.

Purchasing Managers’ Index (PMI) readings for the UK showed that the services sector performed better than expected during December, with firms reporting relatively strong growth. The manufacturing sector remained in contractionary territory, although construction firms reported the softest decline seen for 4 months.

Investors paid close attention to Eurozone inflation data released on Friday. The Consumer Price Index (CPI) showed annual inflation of 2.9% in December, which marked the first month where inflation moved higher since April 2023. The rise from the 2.4% recorded for November prompted some debate regarding the direction of European Central Bank (ECB) policy in the coming months, with some analysts suggesting they will keep rates on hold for longer. Some economists expect inflation to fade again in the coming months and it is notable that core inflation slowed last month.

Data on the labour market in Germany showed that unemployment rose by less than expected in December, suggesting that firms were reluctant to make layoffs despite the economy slowing markedly.

The labour market appeared relatively hot during December, with the US economy adding more jobs than expected at 216,000, versus median economist estimates of 170,000. The data for November was revised lower, with 173,000 new jobs instead of the previous figure of 199,000.

PMI data showed that a decline in manufacturing sector activity worsened during December, whilst the services sector continued to expand. Firms surveyed by the organisation responsible for the PMI data, the Institute of Supply Management (ISM), painted a slightly different picture to the headline jobs report from last week. The survey results showed that employment growth in the services sector slowed by much more than expected during December.

China’s President Xi vowed to strengthen the economy in 2024 during his New Year’s speech to the nation. Xi acknowledged that 2023 had been difficult for businesses and explained that measures will be put in place to achieve “steady and long term economic development”. Meanwhile, US-China relations appeared to deteriorate slightly as the Biden administration reportedly pressured Dutch chipmaking equipment company, ASML, to cancel some shipments bound for China.

Much of the newsflow regarding Japan last week related to an earthquake which struck on New Year’s Day. Whilst the economic impact of the earthquake is still being assessed, last week saw some analysts speculate that the Bank of Japan (BoJ) may shelve plans to tighten monetary policy in the near future. There are concerns that the infrastructure damage may impact economic activity in the region, particularly in factories which have been impacted. The BoJ’s governor, Kazuo Ueda, did however highlight during the week that there will be a reason for Japan to move away from ultra-low interest rates if wages continue rising.

Government bond yields around the globe rose, which impacted Gilt yields, whilst UK fixed income investors may have also been reacting to the better than expected PMI data. With the economy appearing to see some slight growth during December, it could mean that the UK narrowly avoided recession in the 4^th quarter of 2023.

Bond yields appeared to be driven higher by data showing that unemployment rose only slightly in Germany during December, together with confirmation that Eurozone consumer price inflation accelerated during the month.

GBP / EUR – Current 1.1624 Previous 1.1535

Currency traders appeared bullish on Sterling last week. Although the Pound was broadly flat against the US Dollar (-0.09%), this was largely due to the greenback experiencing strength against most major currencies. Against the Eurozone currency, Sterling rose by 0.77%.