This week

In a week which saw card shops and florists throughout the country overflow in the name of Valentine’s Day, there wasn’t too much amour from investors however, as stronger than expected inflation data led to speculation that central banks would be forced to carry on their love affair with rate hikes well into 2023.

With the cost of a dozen red roses and a box of chocolates skyrocketing on the big day, it was only appropriate that the Office for National Statistics released it Average Earnings Index numbers in the morning, showing that wages crept up by 5.9% during the final quarter of 2022, marking the strongest growth seen since the pandemic period. Driven primarily by the finance and business services sectors, each seeing a rate of growth of 7.4% compared to a year earlier, the final reading was however below market estimates of 6.2% and much further below the rate of inflation, remaining among the largest falls in growth in real terms since comparable records began in 2001.

The market’s infatuation with inflation was fed throughout the middle of the week as Consumer Price Index (CPI) figures were released for both the US and the UK. CPI for the US came in at 6.4%, versus estimates of just 6.2% on a yearly basis, highlighting the considerable job the US Federal Reserve still has in its fight against persistent inflation. Dragged up by a rise in the cost of shelter, which mostly reflected rental cost increases, the rise in the sector accounted for nearly half the jump in prices. There were also increases in the price of food, which rose 0.5% on a monthly basis after advancing 0.4% in December, driven by rising prices for meat, fish and eggs. Prices for cereals and bakery goods also rose as did non-alcoholic beverages, but interestingly fruit and vegetables fell in price during the period. The inflation numbers, coupled with extremely strong jobs data from the other week led various Fed officials to lay the groundwork for more rate rises in the coming months. With markets now firmly pricing in at least another one or two 0.25% hikes to come, bond yields made their way higher throughout the second half of the week.

The following day saw CPI data released on domestic shores, with prices rising at 10.1%, below market consensus of 10.3%. Although falling for the third consecutive month and below estimates, much like in the US, the reading shows that the Bank of England still has work to do in its ongoing battle to quell sharply rising prices. Though fuel prices continued to drop, grocery prices propped up the inflation reading, rising 16.7% year on year, driven by sugar and milk prices all increasing by over 40% in a year.

With US inflation coming above expectations, although much lower than in the UK, the US dollar continued to feel the love on the currency markets, with sterling falling below $1.20 on Friday.

Ironically, during a week in which love was in the air, a certain fast-food restaurant with the tagline “I’m lovin’ it” was forced to admit they will be hiking the prices of five items on their menu. McDonald’s announced on Tuesday that “like many businesses, the impact of the increase in food and energy costs continues to affect our company and our franchisees,” although it is considering a budget menu. Putting up the prices of favourites such as a Bacon Double Cheeseburger from £2.49 to £2.69, alongside other items, for example Coca-Cola, will mean a romantic trip to McDonald’s could well be off the menu for many couples on the special day now. “Don’t go bacon my heart” as they say…

Next week

The coming week should be greeted with a more muted start than usual as American markets close in observance of President’s Day. Held on the day that sits equidistant between what would been George Washington’s and Abraham Lincoln’s birthdays, the day now honours all those who have served as President for our American cousins.

In typical American style, there are a great many traditions that go along with the day, including the ceremonial eating of cherry pie and more interestingly, what is claimed to be the country’s longest running and largest George Washington themed birthday parade, held in his birthplace of Alexandria, Virginia.

Perhaps not as exciting as the celebrations held stateside, European economists will have a parade of their own to look forward to, as a positive procession of Purchasing Managers’ Index (PMI) numbers are released on Tuesday. Covering both the Services and Manufacturing sectors, the data will provide a useful gauge for all the major European economies, as well as a composite reading for the Eurozone as a whole. The data will also be released for the UK and the US later on in the afternoon. PMI data is so useful for economists as it acts as a leading indicator of economic health, businesses react quickly to market conditions and their purchasing managers hold perhaps the most current and relevant insight into the company's view of the economy.

All eyes will be back on the US come Wednesday as the Federal Reserve releases the minutes from its latest meeting. Since choosing to slow the pace of its most recent rate hike, both persistently strong labour and inflation data have been released, which could make the Fed’s thoughts all the more fascinating to hear.

In what will prove to be a very US-centric week ahead, investor sentiment could be marching to the beat of preliminary quarterly GDP figures, released on Thursday and influential Core Personal Consumption numbers released at the end of the week. 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 measurement.

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 17 February 2023.