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Markets then and now: What’s changed after a year of war in Ukraine and rampant inflation?

Please see the below article from Invesco received this morning:

Key takeaways

  • In our analysis, Invesco experts offer key insights into the changing risks facing markets and offer their views on what this means for fixed income and equities.
  • The outbreak of conflict on 24 February 2022 exacerbated inflationary pressures. And in hindsight it seems clear that central banks reacted too slowly.
  • Geopolitical and energy risks, though still present, have receded. The focus has largely shifted to monetary policy and whether central banks can curb inflation and avoid recession.

On the first anniversary of Russia’s invasion of Ukraine, the outlook for the global economy is much changed. Geopolitical and energy risks, though still present, have receded. The focus has largely shifted to monetary policy and whether central banks can curb inflation and avoid recession.

So, Russia’s belligerence is just one facet of a complex macroeconomic environment. After years of persistently low inflation, the post-Covid economic restart in late 2021 unleashed inflationary forces across the world as pent-up consumer demand was released despite snarled supply chains. The outbreak of conflict on 24 February 2022 exacerbated inflationary pressures. And in hindsight it seems clear that central banks reacted too slowly. In Europe, meanwhile, the war has had an outsized impact, especially on its energy security.

Amid this backdrop, Invesco experts offer insights into the arc of economic, geopolitical and policy changes since the war started. They also offer their views on key asset classes and environmental, social and governance (ESG) considerations.

Flexible thinking in the fixed income space

The period following the invasion was the worst ever for global credit, which lost 18% from January to October, surpassing even the drawdowns of 2008.

“In truth, the conflict was more of an aggravating factor to the monetary tightening by central banks which had started in Q4 2021,” said Co-Head of Global Investment Grade Credit Lyndon Man.

“Nevertheless, we did see European assets impacted more acutely given the physical proximity and the tighter squeeze on energy supplies.”

Man expects the US Federal Reserve’s rate hikes to “top out” this year, notwithstanding some recent hawkish comments.

“The European Central Bank is playing catchup and European spreads remain wider3 vs. US; Asia also looks attractive having underperformed last year. Though we had a strong rally in January, yields are still at highs not seen since 2009, while flows and corporate fundamentals remain broadly supportive,” he said.

European equities: Renewables in focus

Fears that Europe could face widespread energy shortages were commonplace at the outbreak of the war. But a relatively warm winter helped countries navigate the crisis despite higher energy prices.

“After the initial shock sell-off when Russia invaded Ukraine and subsequent short-term market recovery, energy security and inflation have become the dominant themes driving the European market,” said European Equities Fund Manager James Rutland.

“Energy costs have already fallen substantially, with economists revising up their negative economic forecasts accordingly. With inflation starting to fall from high levels, we could see the headwind from falling real wage growth turn into a tailwind and therefore a rather better outlook for the consumer alongside the broader economic environment,” he said.

ESG and policy: The energy transition

The EU agreed to phase out the bloc’s dependency on Russian fossil fuel imports in March last year. It banned almost 90% of all Russian oil imports by the end of 2022 (with a temporary exception for crude oil delivered by pipeline). In December, it followed up with the introduction of a temporary emergency energy price cap to protect its citizens from excessively high gas prices.

“While much of the response this past year has been dealing with the immediate priority of keeping the lights on by finding alternative sources of gas and oil, political focus is starting to shift towards more structural reforms. These include the structure of the European electricity market and measures to further support renewable energy,” said Invesco’s EU Government Relations and Public Policy team.

The energy trilemma – energy security, affordability, and sustainability – points to renewables in the medium to long term as a resolution to some key underlying pain points around regional energy supply and fossil fuel-led inflation, according to Sudip Hazra, Head of ESG Research.

“Calls for the oil and gas sector, which has the expertise and cash flow to increase investments into the energy transition via diversification into renewables, look set to continue,” he said.

Please continue to check our Blog content for advice, planning issues and the latest investment, markets and economic updates from leading investment houses.

Andrew Lloyd DipPFS

03/03/2023

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AJ Bell: What are the rules around topping up national insurance contributions?

Please see the below article from AJ Bell which provides useful information regarding topping up national insurance contributions. Received this afternoon – 02/03/2023

You need a 35-year National Insurance (NI) contribution record to qualify for the full ‘new’ state pension, worth £185.15 per week in 2022/23. This was increased from 30 years when reforms to the system were introduced in April 2016.

You also need to have an NI record of at least 10 years to qualify for any state pension, with deductions made for every year you have missing.

This doesn’t just include being employed and paying NI – you can also get NI ‘credits’ for things like caring for children or elderly relatives.

If you have worked abroad, earned a low salary or had gaps in employment, you might have holes in your NI record. Handily, there is a website where you can check your NI record and state pension forecast. 

Anyone who previously ‘contracted-out’ of the state pension under the old system (which existed before 6 April 2016) might also be entitled to less than the full state pension (even if they have a 35-year NI record).

Contracting out (which no longer exists) just meant you paid lower NI and in return didn’t receive entitlement to the state second pension (the state pension used to be made up of two parts – the basic part and the state second pension, which was previously called ‘SERPS’).

If you have previously contracted-out, a deduction will be made to your state pension entitlement.  If you aren’t entitled to the full state pension as a result of being contracted-out or you having missing NI years for other reasons, you can buy extra NI years to make up the gap.

However, not everyone who was contracted-out will benefit from buying extra NI years. This is quite complicated and will depend on what you’d have been entitled to under the old system.

The Government’s Future Pension Centre should be able to tell you whether topping up your NI voluntarily will boost your state pension income. If you are considering voluntarily buying NI, contact the Future Pension Centre before parting with any cash, as if you buy NI years and it doesn’t boost increase your state pension, there is no guarantee you will get your money back.

You can usually buy NI to fill gaps in your record for the previous six tax years. However, until 5 April 2023, transitional arrangements introduced alongside reforms to the state pension in 2016 mean you can fill in gaps all the way back to April 2006.

You will usually need to pay voluntary ‘Class 3’ NI contributions to top up your state pension entitlement. In 2022/23, it costs £15.85 to buy one week’s worth of Class 3 NI, or £824.20 per year.

Based on someone increasing their entitlement to the ‘new’ state pension (worth £185.15 per week in 2022/23), that could result in an income boost of £5.29 per week or £275.08 per year.

Comment

Before you get your cheque book out, if you are grandparents, please look up:

https://www.gov.uk/government/publications/national-insurance-credits-for-adults-who-care-for-a-child-under-12-fact-sheet/specified-adult-childcare-credits-fact-sheet

Please continue to check our Blog content for advice, planning issues and the latest investment, markets and economic updates from leading investment houses.

Alex Kitteringham

2nd March 2023

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Brewin Dolphin: Markets in a Minute

Please see the below article from Brewin Dolphin providing their Markets in a Minute commentary. Received late yesterday afternoon 28/02/2023.

Markets muted following strong inflation data

Most major indices ended the week in the red as strong economic data dented investor sentiment. UK and European stocks fell after the US saw a rise in the core personal consumption expenditures (PCE) price index. Investor sentiment was dented by increased fears that persistent inflation could lead to additional interest rate hikes. The FTSE 100 dropped 1.6%, the Dax lost 1.8% and the STOXX 600 fell by 1.4%. The data led US indices to record their worst weekly performance in two months. The S&P 500 slipped by 2.7%, the Dow lost 3.0% and the Nasdaq was down by 3.3%. Over in Asia, Japan’s Nikkei 225 fell by 0.2% as the country’s annual inflation rate rose to 4.3% in January, its highest reading in over 40 years. China’s Shanghai Composite added 1.3% as increased regulatory support offset concerns about geopolitical tensions with the US. Hong Kong’s Hang Seng dropped 3.4% as a stronger US dollar raised concerns about the strength of China’s economic recovery.

Last Week’s performance

  • FTSE 100: – 1.57%
  • S&P 5001: – 2.67%
  • Dow1 : -2.99%
  • Nasdaq1 : – 3.33%
  • Dax: -1.76%
  • Hang Seng: -3.43%
  • Shanghai Composite: +1.34%
  • Nikkei 225: -0.22%
  • STOXX 600: -1.42%
  • MSCI EM ex Asia: -3.08%

* Data from close of business on Friday 17 February to close of business on Friday 24 February.

1 Closed on Monday 20 February

Investor sentiment mixed following EU-UK trade deal

European and UK indices ended Monday’s trading session (27 February) in the green after investor sentiment was boosted by a new deal between the UK and the EU on trade rules for Northern Ireland. However, markets opened in the red on Tuesday as investors scrutinised the deal and awaited regional inflation data from France and Spain. US indices bounced back on Monday as pending home sales jumped by 8.1% in January, the biggest increase since June 2020.

US inflation accelerates in January

 Last week’s economic headlines were dominated by the surprise acceleration in core PCE (excluding food and energy), which is the Federal Reserve’s preferred measure of inflation. The index rose 4.7% year-onyear in January, exceeding economists’ forecasts of 4.3%. On a monthly basis, prices increased by 0.6%, outperforming a predicted 0.4%. This was the highest increase since August. Consumer spending, which accounts for two thirds of US economic activity, grew by 1.8%, the highest level in almost two years and exceeding a predicted 1.3%. Consumption was boosted by increased spending on motor vehicles, household furnishings and equipment, recreational goods and vehicles, and clothing. The service sector, primarily bars and restaurants, saw a 1.3% jump. Increased spending was also seen across the healthcare, recreation and transport sectors. The PCE figures – combined with a strong labour market and consumer price and retail spending data released earlier this month – have again stirred fears that further interest rate increases will be necessary to stifle inflation. Investors are now anticipating a rise in the federal funds rate to between 5.25% and 5.5% by July. This is more than half a percentage point higher than the peak that investors predicted in early February.

Eurozone inflation cools

Last week also saw the release of inflation figures for the eurozone, which showed price rises eased to 8.6% year-on-year in January, down from 9.2% in December. Economists had predicted a marginally lower rate of 8.5%. Core inflation – excluding energy, food, alcohol and tobacco – grew to 5.3% in January from 5.2% the month before.

Eurozone inflation (% YoY)

Inflationary pressures were exacerbated by the continuing Russia-Ukraine war, which has impacted energy and food prices in particular. Prices for food, alcohol and tobacco increased 14.1% year-on-year in January, up from 13.8% in December, whereas energy price gains eased to 18.9% in January from 25.5% in December.

The European Central Bank has promised a half a percentage point interest rate increase in March. Markets are anticipating a further 0.75 percentage point hike this year, which would take the peak rate to near 3.75%.

UK services activity rebounds

Last week’s provisional purchasing managers’ indices (PMI) showed services sector activity in the UK rebounded in February, raising hopes the country could avoid a long recession. The flash S&P Global/CIPS UK composite PMI jumped to 53.0 from 48.5 in January. It rose above the 50.0 threshold that separates growth from contraction for the first time since July. The dominant services sector drove the improved reading, with the services PMI rising to an eight-month high of 53.3. Survey respondents commented on stronger demand for business services amid an improving global economic outlook and reduced domestic political uncertainty.

Please check out our blog content for advice, planning issues and the latest investment, market and economic updates on leading investment houses.

Alex Clare

01/03/2023

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Helen W – Southport

A well deserved testimonial for Carl Mitchell.

My opinion of Carl is based on an informed opinion due to comparison of other financial advisers and experiences of investments.

Carl Mitchell has been our financial advisor for a relatively short amount of time, however, due to previous experiences Carl had a lot to prove to us and to gaining our trust wasn’t going to be easy, we need not have worried. Carl is meticulous and professional in every way. Initially Carl spent several hours getting to know us as people, a family and learning about our business. This I believe strongly gave him the knowledge to fit the products he recommended to us or left some products in place, he felt were appropriate for our needs and showed his true dedication for providing the best service he could.

Each meeting is meticulously documented and reasons why given at every stage. This gained our trust that Carl had our best interests at the forefront of his job, or for Carl, his vocation.

Helen W – Southport – 28/02/2023

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Brooks Macdonald – Weekly Market Commentary: European CPI expected to be a key focus this week

Please see below the latest article from Brooks Macdonald providing their Weekly Market Commentary, which was received late yesterday afternoon (27/02/2023):

Please continue to check our Blog content for advice and planning issues and the latest investment, markets and economic updates from leading investment houses.

Carl Mitchell – Dip PFS

Independent Financial Adviser

28/02/2023

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Tatton Monday Digest

Please see below Tatton Monday Digest article received this morning, which provides a global market update and an update on the UK economy.    

Overview: Balancing acts


Last week saw global equity markets give back some of February’s earlier gains. Even so, global equities have made a total return of around 5% in £-sterling terms since the start of the year. Over the past fortnight though, market participants have come to accept inflation – and in its wake interest rates – will stay higher for longer than previously anticipated. As a result, rising bond yields have been one factor pushing equity markets lower. Global risk assets tend to fare better when the US Dollar is in a bit of a decline, and that was the situation for November through to January. However, as February has progressed, the Dollar has strengthened. The biggest driver of the moves appears to be China, with weakness in the Renminbi. The surprise caused by the end of its zero- Covid policy generated optimism, but a bounce in the economy is taking longer than hoped. Activity may start getting stronger when spring arrives, but global metals and energy price falls are not a great sign.

Still, last week’s preliminary Purchasing Manager Index (PMI) data for January pointed to remarkable strength, especially within services. The resilience of households is striking, but not really surprising, given the buoyancy of jobs markets across the western industrialised world. In the US, seasonally adjusted initial claims (the weekly count of people applying for unemployment insurance) remained below 200,000. A normal level (when the job offers and seekers are in balance) is around 300,000. However, as we discussed last week, despite the tightness in labour markets there is a growing sense that inflation is not in any upward wage-price spiral. Consumption is being underpinned by the solid jobs markets, but not by household borrowing, nor by reducing savings. Spending growth is solid and sustainable rather than booming, and therefore unlikely to be overly inflationary. 

To summarise, it looks as though the big threat to market valuations of a deep and sustained recessionary period – as anticipated at the market lows of last autumn – has passed and given way to a more moderate outlook. At the same time and against the backdrop of once again considerably elevated stock market valuations, this does not mean it is all plain sailing for investors. Nevertheless, as long as labour markets and with them consumer demand continue to be resilient – weakening global growth scenarios should only result in short-term volatility. Patience will once again be of the essence for the long term investor, while for their investment managers, continued scrutiny in assessing and identifying the relative winners and losers from the gradually unfolding scenarios will be the order of the day.

Inconclusive recession indicators leave markets guessing


Recession talk has been rife over the last year, with media commentators – and even some policymakers – suggesting investors and the public should brace for an upcoming global recession. These calls are backed up by many classic contraction signals: bond market upheaval, compressed business sentiment and mortgage credit stress depressing housing market activity. Contrary to this though, several key indicators are suggesting things are not so dire: employment is strong, consumer demand is resilient and equity valuations are still relatively high. With all these mixed signals, what should we make of recession chances?
One of the most well-known predictors of recession is the shape of the yield curve – the difference in maturity between long and short-term government bonds. In a healthy growing economy, the curve should slope upward, as investors expect a stronger economy in the future and therefore demand higher returns when lending over the long-term. By contrast, when investors expect the economy to be weaker in the future than it is now, the reverse happens. The US yield curve has inverted only a handful of times in the last half century. Every single one was followed by a recession. The US yield curve is currently inverted steeper than at any point since the 1980s, as short-term (three-month) deposit rates, and two-year government yields, are significantly higher than the 10-year yield on US Treasury bonds. But this does not mean a recession is guaranteed, much less imminent. For starters, the time lag between inversion and recession is long and variable, historically speaking. And in any case, the effects of rapid inflation and aggressive monetary tightening are severely distorting bond market dynamics. That makes classic signals like these much harder to interpret.

As another fairly reliable recession indicator, credit spreads do reliably spike before and during recessions. But interestingly, the highest credit spreads tend to come when a recession is already at its nadir, which if anything can be seen as a sign of recovery ahead. In fact, since the end of last year, credit spreads around the world have trended downwards. This suggests conditions are not immediately going to turn sour, and explains some of the more positive indicators we are seeing, such as relatively high equity valuations. So, we should take heart in the recent fallback in credit spreads. We are still on recession watch, but the alarms are not sounding just yet.

European gas prices 


Britons are bracing for another energy price hike next month. The energy price guarantee – currently at £2,500 a month per household – will rise to £3,000 in March, unless the Treasury’s plans change, which seems unlikely, despite pressure from major industry players. The recent fallback in wholesale gas prices – which should give the Treasury some breathing room – will only have a “marginal” benefit to public finances, according to Chancellor Jeremy Hunt. That is debatable, depending on how you look at Government spending on the cap which will fall. 

The market prices for natural gas are expected to continue to decline quite substantially. European natural gas recently became cheaper than at any point since the summer of 2021, six months before Russia’s invasion of Ukraine and the subsequent upheaval in international energy markets. Gas is still expensive by historical standards, but crucially, energy supplies – particularly those from Russia – are no longer the immediate threat to British and European economic stability that they seemed for much of last year. Analysis from Morgan Stanley suggests European gas consumption was 22% below the seasonal average in January. Even adjusting for the warmer weather, demand was 14% lower than would be expected at this time of year. The shortfall is not only big but growing too, down from a 10% weather-adjusted fall in December. Much of this seems due to a change in the energy mix, with a 20% increase in wind power generation.

Unfortunately for UK households, falling prices will take time to filter through. But it is only a matter of time, and the effect on budgets should be roughly proportional to the fall in wholesale prices. That means, should gas tumble by more than expected – as is very possible – bills should be lower too. For growth, inflation and for people more generally, that would be a welcome relief during the next cold season.

Please check in again with us shortly for further market news and relevant content.

Chloe

27/02/2023

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Brooks MacDonald Daily Investment Bulletin

Please see below Daily Investment Bulletin from Brooks Macdonald:

What has happened

Equity markets saw huge intraday volatility yesterday as risk assets initially surged then retreated before staging an end-of-day rally. The afternoon sell-off was catalysed by further revisions to the US and European inflation prints whereas the final rally has been attributed to technical factors generating buying activity in the options market. While the focus was on the inflation data, Nvidia’s shares surged following their upside beat to revenue forecasts, this helped lift semiconductor shares more broadly.

Inflation data

The Euro Area core inflation print for January was revised upwards by 0.1% yesterday, bringing the year-on-year rate to 5.3%, the highest since the Euro was formed. This will increase the pressure on European bond markets while also giving additional justification to more hawkish members of the ECB to continue to tighten policy aggressively. The US also saw upward revisions to inflation with the PCE inflation measure rising by an annualised 3.7% in Q4 rather than the 3.2% previously. The core PCE number was also revised higher, from 3.9% to annualised 4.3%, showing that the inflationary slowdown in Q4 was less dramatic than markets had hoped.

Jobs data

The release of the weekly jobless claims provided more comfort to market with both the number of new unemployment claims for the week, and the ongoing number of claims, coming in lower than market expectations. Before anyone prematurely declares victory on the tightness of the labour market, the last 3-months of data have continued to show a tight labour market on many measures.

What does Brooks Macdonald think

While the market moves were dramatic yesterday the volume of market data and news was relatively light. One additional area of volatility was the UK gilt market with the Bank of England’s Mann saying that she believed ‘that more tightening is needed, and caution that a pivot is not imminent.’ One should note that Mann is known as one of the tougher hawks on the Monetary Policy Committee but these comments helped bond markets to almost fully price in a 25bp interest rate hike when the Bank of England next meets in March. This would bring the base rate up to 4.25%

Please continue to check our Blog content for advice, planning issues and the latest investments, markets and economic updates from leading investment houses.

Adam

24/02/2023

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Brooks Macdonald Daily Investment Bulletin

Please see todays Daily Investment Bulletin from Brooks Macdonald:

What has happened

Despite a slightly more upbeat tone to US markets at the start of the day, indices ultimately fell slightly on the back of the release of the latest Federal Reserve minutes. The Federal Reserve terminal rate crept up towards 5.4% after this release while European equities also fell after catching up with the market losses seen late on Tuesday.

Federal Reserve minutes

There has been quite a bit of water under the bridge since the latest Fed meeting, including the strong US jobs report and the stickier US CPI print. Markets were however keen to glean the consensus of the committee and whether it matched the more dovish interpretation given by Fed Chair Powell in the press conference. On the decision to downshift to 25bp interest rate hike increments, this was supported by ‘almost all’ participants.

Prospect of tighter policy

Despite the broad agreement on the downshift, the minutes show significant concerns that insufficiently tight monetary policy now could lead to sticky inflation, a risk that has heightened since the meeting. Specifically, the minutes said that the Fed ‘observed that a policy stance that proved to be insufficiently restrictive could halt recent progress in moderating inflationary pressures, leading inflation to remain above the Committee’s 2 percent objective for a longer period and pose a risk of inflation expectations becoming unanchored.’ Overall, the minutes echoed the more cautious and hawkish central bank narrative that has been expressed by many of the Fed’s voting members in subsequent interviews and press events. President Williams for example yesterday said that he did not want the ‘inflation expectations anchor to slip’, which may require a tougher short term monetary policy response in light of the recent robust economic data.

What does Brooks Macdonald think

The market has largely come towards the Fed’s position over the last few weeks given the stronger economic data. This means that the meeting minutes’ focus on the risks of prematurely loose financial conditions chimes with the bond market’s pricing. One of the metrics that has been highly volatile is the 2-year inflation breakeven which, after approaching 2% around a month ago, now implies an average inflation level of 3%. The Fed will be keen to push that number lower by stressing its commitment to fight inflation.

Please continue to check our Blog content for advice, planning issues and the latest investment, markets and economic updates from leading investment houses.

Andrew Lloyd DipPFS

23/02/2023

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Brewin Dolphin: Markets in a Minute

Please see below, Brewin Dolphin’s ‘Markets in a Minute’ article summarising the key economic and markets news from the past week. Received late yesterday afternoon – 21/02/2023

Stocks mixed as FTSE 100 passes 8,000

Stock markets were mixed last week as US and UK retail sales beat expectations while consumer price inflation eased.

The FTSE 100 added 1.6% in a week that saw the blue-chip index close above 8,000 for the first time. Investor sentiment was boosted by UK retail sales rising 0.5% month-on-month, exceeding economists’ expectations for a 0.3% fall.

In the US, the S&P 500 was down 0.3% and the Dow lost 0.1% as economic data raised fears of further interest rate hikes. A strong performance among technology stocks helped the Nasdaq grow by 0.6%.

In Asia, China’s Shanghai Composite dropped 1.1% and Hong Kong’s Hang Seng lost 2.2% on concerns of escalating geopolitical tensions between China and the US. Japan’s Nikkei dropped 0.6% following lower-than expected gross domestic product (GDP) growth in the final quarter of 2022.

House prices rise by just £14

UK and European indices made marginal gains on Monday (20 February), with the FTSE 100 and STOXX 600 both up 0.1%. In economic news, figures from Rightmove showed UK house prices rose by just £14 in February, the smallest January-to-February increase on record. On an annual basis, house prices grew by 3.9% following a 6.3% rise the previous month.

US markets were closed on Monday for President’s Day.

The FTSE 100 opened in the red on Tuesday (21 February), despite data showing the government unexpectedly recorded a budget surplus of £5.4bn in January as self-assessment income tax receipts hit a record high.

UK inflation slows

Figures released by the Office for National Statistics (ONS) last week showed UK inflation, as measured by the consumer price index (CPI), eased to 10.1% year on-year in January from 10.5% in December, exceeding economists’ predictions of 10.3%. On a monthly basis, the CPI fell by 0.6% in January. Prices for transport, restaurants and hotels fell month-on-month, whereas tobacco and alcohol rose 2.7%.

Encouragingly, core inflation – excluding energy, food, alcohol and tobacco – fell to 5.3% in the 12 months to January from 5.8% in December, much lower than the 6.2% forecast by economists. Nevertheless, economists are still anticipating a further interest rate hike of 0.25 percentage points in March.

Separate figures showed UK retail sales unexpectedly grew by 0.5% in January, whereas economists had been predicting a 0.3% fall. Consumer confidence was boosted by seasonal discounts and falling fuel prices. On an annual basis, sales volumes declined by 5.1% compared to January 2022.

US economic data sparks rate hike fears

Over in the US, figures showed that while consumer inflation eased in January, it remained higher than anticipated. Markets were volatile following the release of the data, which showed prices rose by 6.4% year on-year in January, a modest decline from 6.5% in December and higher than the predicted rate of 6.2%. Core CPI measured 5.6% year-on-year in January, a drop from 5.7% in December but higher than the anticipated 5.5%. On a monthly basis, CPI grew by 0.5%, with about half of the increase driven by rising shelter costs.

Meanwhile, the producer price index (PPI), which measures the change in prices that producers receive for their goods and services, rose at an annual rate of 6.0% in January, down from 6.5% in December. Month-on-month, prices rose by 0.7%, the largest increase since June, surpassing economists’ predictions of 0.4% growth. Core PPI rose by 0.5%, the highest rate since May last year.

US retail sales were also higher than expected, growing by 3.0% in January. This was the largest increase in nearly two years and almost double forecasts of 1.8%. On a year-to-year basis, retail sales rose by 6.4%, largely driven by motor vehicle purchases.

The combination of resilient consumer spending and high inflation has raised expectations that a further interest rate increase of 0.5 percentage points may be necessary to stifle inflation.

Japan GDP grows less than expected

Japan’s economy grew by an annualised 0.6% in the final quarter of last year, falling significantly short of the market’s forecasted 2.0%. Although the Japanese economy avoided a technical recession, it rebounded less than expected after GDP contracted by 1.0% in Q3 2022. For the full year, the world’s third-largest economy expanded by 1.1% compared with a 2.1% increase in 2021.

Please continue to check our Blog content for advice, planning issues and the latest investment, markets and economic updates from leading investment houses.

Alex Kitteringham

22nd February 2023

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Brooks Macdonald Weekly Market Commentary: Increased US inflationary pressures cause the bond market to upgrade its interest rate forecasts

Please see the article below from Brooks Macdonald providing a Weekly Market Commentary. Received this morning 21/02/2023

A near-term increase in US inflationary pressures cause the bond market to upgrade its interest rate forecasts

Last week was characterised by a broad market reappraisal of the likely path of interest rates given stickier inflation and more robust economic growth. The bond market increased its expectations of US terminal interest rates by 10bps, with the US terminal interest rate for this cycle now expected to hit 5.28%. Despite this move, equities managed to insulate themselves from this move, with the US index posting a small loss while the European index outperformed, rising by over 1%.

Global flash PMI surveys on Tuesday will help investors gauge whether the recent US economic strength is broad

Tomorrow sees the release of the global flash PMIs which will provide an assessment of economic growth momentum on a country-by-country basis. Alongside these reports, European consumer confidence surveys will be released as well as important German industry surveys. Markets have been caught off guard by the strength of the US economy so far this year, with Fed Governor Bowman saying that she was surprised that the interest rate hikes so far had done relatively little to cool demand. The economic data this week will help markets assess whether economic demand remains robust outside the United States and whether the recent increase in the market’s ECB interest rate hike expectations is warranted.

The PCE inflation reading on Friday is likely to echo the US CPI report in showing stickier inflation at the start of 2023

With the US CPI release now out of the way, the market will turn to the PCE deflator, the inflation measure preferred by the Federal Reserve. The personal income and consumption report will provide a good gauge of the health of the US consumer on Friday with income and consumption both expected to rise versus last month’s reading. The Core PCE reading will be closely watched to see if it echoes the stickier inflation backdrop suggested by the CPI release. If prices are increasing due to stronger-than-expected US consumer consumption, this will give a clear mandate to the Fed to remain tough on inflation and double down on its hawkish narrative.

After a quiet start to the week as the US closes for Presidents’ Day, the equity market will need to decide whether to retreat or rise after a directionless fortnight for markets. The disconnect between bond pessimism and equity optimism will need to close over the coming months. One of the factors helping support equity markets is that investors, based on recent industry surveys, are still overweight bonds and underweight equities, this may allow equities to continue to perform despite the tougher inflationary backdrop.

Please check our blog content for advice, planning issues and the latest investment, market and economic updates from leading investment houses

Alex Clare

21/02/2023