Market Update – 18th January 2023.

18th January 2023

There has been a lot of economic data releases so far this week whilst trading has been low with the US market closed on Monday to mark Martin Luther King Day.

The World Economic Forum’s (WEF) annual meeting kicked off in Davos on Monday. The event, held in Switzerland, brings together political and business leaders from across the world to address global, regional and industry objectives for the year ahead. Markets will be watching the event closely to gain insight on what 2023 might look like for global businesses and economies.

Economic data from China provided a promising outlook as the country looks to revive its economic growth. The Chinese economy expanded by 3% in Q4 of 2022, greater than market expectations of just 1.8%. The country’s long-standing zero-Covid policy stifled economic growth last year, however we are starting to see an increase in consumption as the economy comes back online. Yesterday in Davos representatives from China made it clear that the country wants international investors to play a key role in Beijing’s efforts to stimulate the economy.

Chinese industrial production increased by 1.3% in December, far greater than market estimates of a 0.2% rise. Retail sales also beat expectations dropping by 1.8% versus market estimates of an 8.6% fall, with some Chinese consumers remaining cautious despite the relaxation of Covid-19 restrictions.

The US and China have been seen to be strengthening relations in Davos; the countries have pledged to manage their differences and find ways to work together to achieve economic growth. Last week US CPI data showed inflation was continuing to fall, and data released this week largely followed suit.

Signs of price cooling could mean central banks are less aggressive with incremental rate hikes this year. Inflation in Germany, Europe’s largest economy, was at 8.6% in December of 2022, the lowest in four months. The slowdown in price rises in the region was mainly down to an 11.6% decline in energy prices. Ireland’s CPI also slowed to 8.2% in December, down from 8.9% in the previous month. Natural gas prices in Europe have fallen to a 16-month low as the continent experiences mild weather leaving reserves relatively untouched.

The annual inflation rate in the UK fell to 10.5% in December down from 10.7% in November, matching market forecasts. It marks a second consecutive month of slowing inflation and the lowest rate in three months. The largest downward contribution came from transport prices, specifically motor fuels. The UK unemployment rate was unchanged at 3.7% year on year in the three months to November, whilst regular pay excluding bonus payments went up 6.4% on year over the same period, the largest increase since 2001. Labour market data showed that conditions remain tight and wage growth remains strong which adds further pressure on the Bank of England to raise rates on the 2nd of February.

The Bank of Japan’s decision to widen the allowance band around its yield target led to speculation in the market that it would also alter its short-term interest rate. However, the Bank of Japan surprised markets today, as policymakers decided to maintain its ultra-low interest rate at -0.1% and maintained its target for 10-year yields. The bank’s governor Kuroda reaffirmed the ultra-easy policy, to achieve the price target, and with real wages falling Prime Minister Kishida has recently warned businesses that the country is at risk of stagflation and has urged bosses to accelerate wage hikes.

Still to come this week we have Eurozone inflation, US PPI, US retail sales and industrial production. Also, from the US we are expecting initial jobless claims and housing stats along with the Fed’s Beige book. Elsewhere there is Japanese CPI, UK retail sales and consumer confidence.

Investment Management Team