Market Commentary 16th January 2023 – from Charlie Hancock

UK economic data surprised to the upside, with Gross Domestic Product (GDP) expanding by 0.1% in November. The better than expected growth is likely to mean the UK narrowly avoided a recession during the final quarter of 2022.

Key Bank of England (BoE) members continued to deliver a downbeat message on the economic outlook for the UK. The central bank’s chief economist, Huw Pill, stated that the UK faces a ‘unique combination of challenges’ in high inflation, rising interest rates and a shortage of workers. Pill stated that he believes underlying structural forces create the potential for inflation to prove more persistent than expected in the UK.

An initial estimate from the German statistics agency indicated that economic growth flatlined during the final quarter of 2022. The government stated that they expect the winter slowdown to be milder and shorter than expected. Analysts warned that Germany’s economic problems have not disappeared, with significant uncertainty around energy supplies for the 2023-24 winter.

Eurozone industrial production rose by 1% in November, beating economist expectations for growth of 0.5%. Easing supply chain constraints contributed to the improvement in the manufacturing sector.

Official data showed the US Consumer Price Index (CPI) rose by 6.5% year-on-year during December, which was broadly in line with expectations.  Core inflation, which strips out food and energy prices, came in at 5.7%. The data added to hopes that US inflation will continue to cool in the coming months.

Banking giants JPMorgan Chase, Bank of America and Wells Fargo released fourth quarter earnings results on Friday, with all posting better than expected profits, however, the management teams delivered a cautious outlook. The JPMorgan CEO stated that the US economy “currently remains strong” but cautioned that they do not know the ultimate effect of the headwinds coming from geopolitical tensions, persistent inflation and rising interest rates. The Bank of America CEO said the economy is “increasingly slowing”.

A senior official at China’s central bank signalled that the regulatory changes imposed on Technology companies are nearing completion. This coincided with reports suggesting that state owned entities will be granted shares with special voting rights in Tech giants such as Alibaba and Tencent. Economic data was mixed. Exports fell by just under 10% in December, however, the decline was less than feared. Factory gate prices declined during December, whilst consumer price inflation was just 1.8%.

Investors paid close attention to the outlook for policy changes at the Bank of Japan (BoJ). The central bank remains the only major central bank in the developed world to keep interest rates at record lows. Reports suggested the BoJ will revise their inflation forecast to around 2% for 2023, but a move away from zero interest rates may not take place until the current governor’s tenure finishes in April.

Bond yields declined gradually across the week. Data showing that inflationary pressures in the US cooled during December appeared to keep downward pressure on yields around the globe.

Whilst the German economy avoided recession during the final quarter of 2022, stagnating growth added to concerns that a recession will arrive at some point during 2023.

The US CPI posted a year-on-year increase of 6.5% during December, however, headline prices fell by 0.1% in comparison to November, adding to hopes that inflation will continue to soften in the coming months.

GBP / EUR – Current 1.1291 Previous 1.1362

The Pound rose by 1.11% against the US Dollar, with the greenback weakening against most major currencies. The week’s positive economic data for the Eurozone contributed to Sterling declining by 0.62% against the Euro.