Market Update – 15th February 2023.

24th February 2023

Markets focus this week remained heavily on US and UK CPI data.

Whilst love was in the air on Tuesday (14 February) as people around the world celebrated Saint Valentine’s Day, not everyone was loving the latest US CPI report. The annual inflation rate in the US slowed slightly to 6.4% in January of 2023 from 6.5% in December.

January’s CPI data came in slightly higher than expected, missing market forecasts of 6.2%, disappointing those in the market hoping for an early pause to the Fed’s monetary tightening.

The release marked the seventh consecutive month of easing inflation: whilst positive, on a month-by-month basis prices in January rose by 0.5% up from the previous 0.1% increase during December 2022, with rising shelter costs leading the index higher.

US CPI data continues to show the general trend of slowing inflation, however, as the Fed has said time and time again, they remain data dependent. With a tight labour market and signs of sticky inflationary pressures, the Fed looks set to continue along the path to higher rates albeit at a reduced rate.

Despite signs that the UK may enter a shallow recession this year, the labour market remains somewhat resilient. The unemployment rate was unchanged in the three months to December at 3.7%, remaining close to historically low levels. The number of people in work grew by 74,000 over the same period, well above market expectations of a 40,000 increase.

The number of people claiming unemployment benefits fell by nearly 13,000 in January of 2023, following a 3,200 fall in December. There were signs of weakening in the labour market, as the number of vacancies in the November to January period fell again marking the seventh consecutive reported drop.

Although real wages still lag inflation, pay excluding bonuses rose by 6.7% year-on-year in the period between October and December 2022, greater than expectations.

The annual rate of inflation in the UK fell to 10.1% in January from 10.5% in December 2022, below market forecasts of 10.3%. On month CPI dropped by 0.6%, with the biggest contributor to the decline being transport costs (passenger transport and motor fuels).

It’s positive that inflation in the U.K. has consistently fallen over the past three months. With inflation falling faster than expected last month and the UK avoiding falling into a recession in Q4 of last year, the Bank of England needs to remain vigilant in its monetary policy tightening cycle.

Turning to Europe, the region’s economy avoided falling into contraction in the fourth quarter of 2022. The region’s GDP grew by 0.1% on quarter, less than 0.3% growth in the third quarter, but matching expectations. In addition, preliminary data also showed that employment in the region rose by more than expected.

Still to come this week we have US & UK retail sales; US & Eurozone industrial production; and US housing data.

Kate Mimnagh, Portfolio Economist