This week

The Pennsylvania Dutch brought a great many customs with them when settling in America during the early 1800s from German speaking Europe. Bright and colourful furniture and buildings, hanging their Christmas trees upside down and even more curiously, their various weather folklores, attempting to predict the beginning of spring.

First taking place on 2 February 1887, Groundhog Day is marked by announcing whether a small furry critter named Phil sees his shadow after emerging from his burrow. An overcast day will usually mean he won’t and will fully venture out, however, on a sunny day, the groundhog will be scared by his own shadow and retreat into hibernation, signalling six more weeks of winter.

The other concept of Groundhog Day, being a day of pure repetition, was not lost on homeowners on Wednesday, with data from Nationwide building Society showing house prices fell for a fifth month in a row. As mortgage rates continue to rise, stymieing demand, annual house price growth has now slowed to 1.1% for January, down from 2.8% in December. The figures also tally with a report from the Bank of England (BoE) released earlier in the week that showed lenders had approved fewer mortgages than expected during December, with only 35,000 getting the green light, compared to more than 46,000 the previous month.

Whilst the humble groundhog may fear its own shadow, the long shadow that inflation cast over financial markets last year that had investors running scared, may slowly be dissipating. Speaking on Wednesday, the US Federal Reserve raised rates by a reduced 0.25% yet continued to promise "ongoing increases" in borrowing costs as part of its still unresolved battle against inflation. Despite this, the Fed did comment that the US economy was enjoying "modest growth" and "robust" job gains, with policymakers still "highly attentive to inflation risks." Interestingly, the statement did also indicate that any future rate increases would be in 0.25% increments, dropping a reference to the "pace" of future increases and instead referring to the "extent" of rate changes.

Despite the term “ongoing increases”, financial markets took the Fed’s words to mean it was finally emerging from the hawkish burrow it had dug itself and much like those Pennsylvanian Dutch, took it as a sign of an early springtime for markets. The tech heavy NASDAQ rose 2% whilst the yield on the 2-year Treasury, the maturity most sensitive to Fed policy expectations, rose to fell by 11 basis points to about 4.12%. The belief that the Fed was almost done hiking rates was also felt in the foreign exchange market, where the USD sank more than 1% against a basket of other currencies.

Back on domestic shores, it has felt like Groundhog Day on Threadneedle Street since December 2021, as the Bank of England (BoE) has consistently hiked rates each month since. Although the bank raised rates by another 0.5%, as expected, this time around there was a definite change of tone, with the key message being that that are close to or have even arrived at their peak. However, although the language used around future hikes was much softer than before, and the BoE stressed that the full impact of past hikes was still to be seen, leaving the door open for a possible 0.25% rise next month. The relief for the more UK orientated FTSE 250, was palpable, expecting the sun to shine on the UK economy early, rose 3.60% on the day.

The European Central Bank (ECB) were the last major central bank to poke its nose into the wintery air this week, hiking rates on the continent by another 0.5%. Announcing it would repeat the move next month as well, the ECB failed to offer any clear guidance beyond March. Reflecting the balancing act, the bank is trying to perform, dovish comments focussed on slowing headline inflation and energy prices were offset by hawkish comments on underlying inflation being "alive and kicking". However, much like in the US and UK, investors certainly seemed to think the clouds on the investment horizon are clearing, with the European Stoxx 600 hitting its highest since April. On the fixed income markets, Germany's 10-year bond yield slid 23 bps, its largest fall in almost a year, as its price surged, with Italian yields posting their biggest one-day fall since the ECB unleashed emergency stimulus during the Covid pandemic.

From market forecasting to weather forecasting, Thursday of course also brought with it the a forementioned Groundhog Day. All eyes in the US moved from Wall Street to Gobbler's Knob in Punxsutawney, Pennsylvania, and just like last year, and the year before that, the legendary groundhog saw his shadow and ran back into his hole, meaning they can expect a further 6 weeks of Winter.

Next week

The beginning of the week should start with the greatest of ironies as Monday brings with it both a nurses’ strike and a talk from the Bank of England’s (BoE) aptly named Chief Economist, Hugh Pill.

Due to speak about the central bank’s Monetary Policy Report at an online event hosted on Threadneedle Street, Pill has a strong influence on how the bank votes on future rate policy and so his formal addresses are often scrutinised by investors for any subtle clues on how he and his fellow members will vote.

From what the BoE makes of the domestic economy to what the domestic economy is making should characterise the beginning of the week, as Tuesday sees Construction PMI figures released by the Office of National Statistics. The data comes from a survey of about 150 purchasing managers in the construction industry, all of whom are asked to rate the relative level of business conditions including employment, production, new orders, prices, supplier deliveries and inventories. The data is highly thought of by 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.

Having given markets fairly mixed messages over the US Federal Reserve’s next steps in terms of rate policy, the head of the central bank, Jay Powell, will be speaking from Washington on Tuesday. With markets focussing on the positives from his previous speech rather than his argument that the Fed is not done with raising rates, it will be interesting to see the tone he takes after global stock markets optimistically rose nearly 5% last week.

The coming week should be rounded off with the University of Michigan’s US Consumer Sentiment and Inflation Expectations Survey. The two sets of data should give us a more comprehensive view of the US economy, showing us just how confident the American consumer is feeling as well as the prices they expect to pay for goods over the coming year.

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 03 February 2023.