23rd January 2024
UK inflation heads away from 2% goal with small rise this week
UK figures released this week indicated a slight rise in inflation in December, which was an unpleasant shock for those anticipating that inflation had been firmly heading down towards the 2% objective.
The Office for National Statistics (ONS) reports that during November and December, the UK’s inflation rate went from 3.9% to 4.0%, a small increase.
Even though it was only a modest spike, this was the first increase in inflation in 10 months.
The government’s announcement of new tobacco duties during the Autumn Statement was the main driving force behind it.
Head of Economic Research, Hetal Mehta, explained what this could mean:
“After coming in weaker than expected in November, UK inflation numbers for December surprised to the upside, so we ended the year at 4%. Inflation will continue to fall through this year, but the trajectory will be bumpy.
“The Bank of England will need more convincing evidence of inflation getting sustainably to 2% before signalling a willingness to cut rates. The third quarter of 2024 is still more likely than [the] first half of the year for the beginning of the easing cycle.“
Eurozone markets watch closely for signs of an interest rate cut
The FTSE 100 dropped throughout the course of the week as reports indicated that the path to 2% inflation would not be as smooth as many had anticipated.
Similar events occurred in the eurozone, where stocks declined due to dwindling expectations of a cut in interest rates as early as March. As inflation decreased over 2023, these expectations grew; however, some European Central Bank (ECB) officials pulled back on their support for the plan last week.
President of the ECB, Christine Lagarde, told Bloomberg:
“There is still a level of uncertainty and some indicators that are not anchored at the level where we would like to see them.”
A cut is still most likely to come next, although this is now predicted to happen later in the year. Nevertheless, when the ECB meets on Thursday, markets will be watching closely. Every indication as to when interest rates could shift will be closely examined by market players.
Tech stocks and AI help boost US performance
Those who followed US markets in 2023 would have recognised the pattern of an increase in US indexes headed by technology firms this week.
This momentum has been supported by the optimism around artificial intelligence (AI), which has been fuelled by predictions of significant earnings growth over the coming years. A number of companies involved with AI experienced further excellent performance last week.
In local currency terms, the S&P 500 gained 1.2%, while the NASDAQ, which is dominated by the technology sector, increased by 2.3%. This happened in spite of a drop in Federal Reserve (Fed) rate-cut expectations for this year, which have subsided in light of inflation data that is above expectations.
China faces declining equities and a tumultuous real estate market
In China, where the Shanghai Composite index fell for the eighth time in nine weeks, the situation remained complicated. 5.2% GDP growth during the three months prior is impressive when compared to Europe, but it was also a little less than anticipated.
The continuous difficulties in the real estate market and the reports that China’s population would decline by more than 2 million in 2023 have probably soured people’s moods.
Martin Hennecke, Head of Asia Investment Advisory and Communications at St. James’s Place, pointed out that technological and regulatory advancements might still support Chinese company valuations even if the country’s economic and demographic situation remains challenging. He commented:
“With China observers focused on GDP data last week, many investors seem to be unaware of the security regulator’s (CSRC) recent drive to promote shareholder value by pushing companies to raise dividend pay-outs and facilitating stock buy-backs – akin to a similar initiative we saw in Japan that helped drive the Nikkei 225 to a 34-year high the prior week.”