This week

With much of the country waking up to a blanket of snow on Monday morning, it seems that financial markets weren’t the only ones being met with a frosty reception this week, as an avalanche of inflation readings and central bank rate hikes were given something of a cold shoulder by investors.

There’s snow rest for the wicked as they say, with UK GDP data greeting economists first thing on Monday morning. Showing that the economy had expanded on a monthly basis by 0.5%, ahead of the 0.4% forecast, the week started off strongly. However, there is still a good chance the domestic economy will fall into recession next year despite a 0.6% growth in the Services Sector, which dragged the reading up, allowing for some festive cheer at least.

Staying in the UK, Wednesday Consumer Price Index (CPI) readings showed the first signs of inflation thawing, coming in at 10.7%, down from last month’s 11.1% and lower than estimates of 10.9%. The largest downward contribution towards prices came from transport, particularly petrol prices. However, this was partially offset by the upward contributions coming from rising restaurant and hotel prices. Food and drink prices did the bulk of the work, jumping 16.4% in a month, the biggest rise since 1977.

Whilst temperatures plummeted, events were really hotting up on Threadneedle Street, as the Bank of England raised rates, as widely expected, by 0.5%. Sitting at their highest level in 14 years, the bank’s Monetary Policy Committee voted 6-3 in favour of upping rates to 3.5%, their ninth hike in nine meetings this year. Interestingly two members wanted to halt rate rises altogether, whilst another member wanted to see rates hiked by 0.75%. The bank commented that "further increases” may be required although the worst of the inflationary pressure we have seen may have passed-if you catch their drift. 

"The labour market remains tight and there has been evidence of inflationary pressures in domestic prices and wages that could indicate greater persistence and thus justifies a further forceful monetary policy response." 

The market reaction to the bank’s move was fairly muted, with the outcome roughly what many investors had anticipated. Although, sterling weakened against the USD throughout Thursday, with government bond yields also making their way downwards.

They say with great power, comes great responsibility, as the middle of the week saw the US Federal Reserve, the central bank for the world’s largest economy, also raise borrowing costs by 0.5%. With Tuesday’s US CPI reading coming in at 7.1% v consensus estimations of 7.3% markets were given hope that the Fed may soon dial back the pace of its inflation-busting rate hikes. Far from going into meltdown, the S&P 500 rallied as much as 2.76%, to a three-month high, before seeing sustained profit taking throughout the day.

Much like the BoE, the Fed raised rates by 0.5% the day after its country’s CPI reading, the Fed also signalled that although price rises were subsiding, the battle against inflation was not won just yet, with more hikes signalled. Indeed, only two of the nineteen Fed officials saw interest rates staying below 5% next year, with their new rate currently sitting between 4.25-4.5%.

Putting the icing on the cake of central bank rate rises this week was the European Central Bank (ECB), who became the 3rd institution to raise borrowing costs by 0.5% in a week. The bank did stress significant tightening remained ahead and laid out plans to drain cash from the financial system as part of its own fight against runaway price rises. The latest hike leaves rates at 2% on the continent with the ECB commenting that it sees any recession to be "relatively short-lived and shallow". The hawkish tone of the statement pushed the euro above $1.07, its highest level for nearly half a year. Although all three banks could be seen as being slightly more constructive than expected, to become too optimistic on the outlook for global economy just yet could well prove to be a slippery slope…

 

Next week

After such a busy week last week, the last few working days before Christmas leave us with an understandably much quieter run in towards the big day.

Although there should be a fair few Quiet Nights for economists coming up, Tuesday could result in a late one for some, as the Bank of Japan (BoJ) holds a press conference to announce any changes to its base rates and to also give its outlook for the Japanese economy going forward. Consensus is for the BoJ to keep its negative interest rates and yield curve control intact for now, even as other central banks around the globe still rush to hike their respective rates.

The middle of the week will see attention switch to the US, as consumer confidence numbers are released. The data is so well respected and can have a heightened impact on the market due to the sheer breadth of the survey. About 3,000 households are asked to give their views on the relative level of current and future financial conditions in the US, including job availability, business conditions and the overall economic situation.

The week should be wrapped up neatly for Christmas with more US data on Friday, this time monthly Core PCE Price Index numbers are released. The data differs from normal inflation readings in that it only measures goods and services targeted towards and consumed by individuals. Prices are weighted according to total expenditure per item which gives important insights into consumer spending behaviour. Adding even more importance to the figures if that this is reportedly the preferred piece of data for the US Federal Reserve, using it as their primary inflation measure.

 

The information in this blog or any response to comments should not be regarded as financial advice. If you are unsure of any of the terminology used you should seek financial advice. Remember that the value of investments can go down as well as up, and could be worth less than what was paid in. The information is based on our understanding as at 16 December 2022.