Having started the week on the front foot, it felt as if investor concerns shifted slightly as the week progressed.
Fears about inflation were replaced by concerns about the overall health of the economy, with equity markets softer as a result.
Weaker-than-expected economic data in the US on Wednesday provided hope that the battle against inflation might be working but also prompted worries that the overall economic cost may prove significant. Retail sales in the US declined more than expected in December and manufacturing output also came in lower than anticipated.
Equity markets have climbed over the past month, largely on the belief the Federal Reserve (Fed) can pull the proverbial rabbit out of the hat. This faith is centred around their ability to lower inflation and produce the ‘soft landing’ to the economy that both equity and bond investors desperately desire. These new data points illustrate that it is too early to call if they can manage this feat. While the labour market remains strong, the Fed are likely – even in the face of this new data – to continue tightening monetary policy, adding further pressure to the financial health of companies and individuals alike.
Following last week’s US inflation data, which showed a slowing to 6.5%, it was the turn of the UK on Wednesday. The Office for National Statistics said annual inflation in December slowed to 10.5% from 10.7% in November. The trend of falling inflation, from its 41-year peak in October of 11.1% is welcome, however, the 16.8% rise in food prices demonstrated that the cost of living crisis is showing little sign of abating.
John Naylor, Chartered FCSI – Head of Investment Committee