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Weekly comment: Cooling inflation and consolidated market gains

Date: 23 January 2023

Weekly podcast – Market overview

This week’s host, Investment Manager, Tim Horrocks, discusses the ups and downs of the past week with Head of Fixed Interest Research, Richard Carter and Equity Research Analyst, Jamie Maddock, who specialises in commodities and energy. Among the topics discussed – volatile commodity markets and the prospect of falling rates of inflation.

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Market overview – Alan McIntosh, Chief Investment Strategist

Global equities paused to take stock last week following a strong start to the new year, with the MSCI All Country World Index sliding 0.3% and paring the year-to-date gains slightly to 5.2%. Softer economic data weighed on sentiment a little as retail sales figures in the UK and US came in worse than expected, while hawkish rhetoric from European central bankers also kept any signs of over-exuberance in check.

For the month of December, US retail sales declined 1.1% for the largest month-on-month decline in a year. On the day of the release, US large-cap stocks posted their largest one-day fall in over a month while US Treasuries rallied, and the US dollar traded down to a seven-month low. It would be folly to draw too many conclusions from a single, and volatile, data point, but other figures do also point to a general slowdown in US economic activity.

Overall, it currently seems to be a case of slowing growth, a strong labour market and falling inflation. Given the growing consensus that the Federal Reserve (Fed) is closing in on ending its raising-rates cycle, forthcoming data on the economy and employment will likely assume an even greater role in determining investor sentiment.  

US stocks ended last week down around 0.6% but were trading a fair bit lower before a sizable rally on Friday recouped the bulk of the declines. Earnings season on Wall Street is underway and the number of corporations reporting is set to ramp up this week with approximately a quarter of stocks in large-cap benchmarks scheduled to deliver updates.

US underperformance has been a theme of the move higher in equities in recent months after markets bottomed in October, with a weaker US dollar, lower than feared energy prices (which have benefitted regions such as Europe relatively more) and China re-opening all playing a role. US rate setters are now in a blackout period ahead of their first monetary policy meeting of the year, with interest rate markets pricing a high chance of a 25 basis point increase. The following day the Bank of England (BoE) and European Central Bank (ECB) are seen opting for 50 basis point rises and an interest rate path ahead containing more increases for the BoE and the ECB than the Fed in the coming months is seen exerting downward pressure on the US dollar. The 10-year Treasury yield ended last week little changed at 3.48%.

Inflation cooling

The UK consumer price index fell on a year-on-year basis for the second month running, according to the latest figures, providing consecutive declines in this metric for the first time since May 2020. “The beginning of a sign that a corner has been turned,” was how Andrew Bailey, BoE governor, described the figures. Lower petrol prices were a key driver in the decline and Bailey also broadly agreed with the current interest rate market pricing, showing the BoE base rate peaking at 4.5%. It is currently 3.5%.

UK stock benchmarks declined a little under 1% on the week but remained 4.3% higher for 2023. The pound gained, rising to 1.24 against the US dollar to trade near seven-month highs. In the bond market 10-year gilts treaded water, ending the week at 3.37%.

It was a similar story for the Eurozone with core European government bonds also little changed and the single currency edging up to a nine-month high against the US dollar. Bourses on the continent pulled back a little from their exuberant start to the new year, falling 0.7% on the week but remaining 8.7% higher year-to-date.

Christine Lagarde, ECB president, pushed back on market speculation that lower energy prices enable the central bank to slow the pace of monetary tightening, during a speech at the World Economic Forum in Davos, Switzerland. Lagarde described inflation as “way too high”, and minutes from the Governing Council’s last policy meeting, at which interest rates were raised by 50 basis points, showed sizable support for a 75 basis point increase.


Tim Horrocks

Investment Manager
Richard Carter

Richard Carter

Head of Fixed Interest Research

Jamie Maddock

Equity Research Analyst

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