Market Update – 14th February 2024.

Key Consumer Price Index (CPI) data was released from the US and the UK this week as it was revealed they were at the forefront of the markets. The eagerly awaited US CPI report took the stage on Tuesday, leaving investors yearning for hints of potential policy easing by the Federal Reserve. The headline inflation rate came in at 3.1% in January 2024, a tad higher than forecasts of 2.9% but maintained its downward trend from December’s 3.4%. The annual core rate (excluding food and energy) maintained its ground at a robust 3.9% in January 2024, holding firm from the prior month, but again came in hotter than the 3.7% expected.

The data highlights policymaker’s sentiment that the path towards the 2% target is far from a smooth ride. Market sold off with investors betting on rate cuts left disappointed, it’s crucial to note that the Federal Reserve’s policy decisions won’t pivot solely on these results. Regardless of this short-term noise, it’s important to recognise the US market’s impressive performance this year (S&P 500 TR over 5% YTD) which has a positive impact on sentiment.

As we have emphasised numerous times, the Fed’s focus remains on ensuring inflation aligns with the 2% target before considering any abrupt rate cuts. Despite the clamour for lower interest rates, it is crucial to heed the Fed’s commitment to data-driven decisions and price stability. A small market correction creates opportunities for long-term investors to capitalise on potential gains.

Turning to the UK, the unemployment rate dipped to 3.8% on year in Q4 of 2023, down from 4.2% in the three months to November, surpassing market forecasts that predicted a rate of 4%. Wages continued to moderate albeit coming in slightly higher than market forecasts. Excluding bonuses, regular pay grew by 6.2% on year in Q4, down from 6.7% in the previous period, the lowest in over a year. Wages also continued to outpace inflation for the sixth month in a row, underscoring the Bank of England’s (BoE)caution against moving too quickly to cut interest rates.

A crucial factor contributing to the market’s heat is the surge in long-term sickness-related inactivity, with 2.8 million individuals inactive for health reasons by the end of 2023. Business surveys also point to skills shortages that continue to drive up wages.

Markets breathed a sigh of relief this morning as data revealed the UK inflation rate held steady at 4% in January 2024, below market expectations of 4.2%. The annual core inflation rate (excluding food and energy) came in at 5.1%, and held steady for the third consecutive month, falling slightly below the anticipated 5.2%. Rising gas and electricity costs contributed to the upward trend, while furniture and food exerted a downward pressure on inflation. Despite the relief felt by markets this morning, inflation remains double the BoE’s target of 2%. Chancellor Jeremy Hunt said, “Inflation never falls in a perfectly straight line, but the plan is working; we have made huge progress in bringing inflation down from 11%, and the BoE forecast that it will fall to around 2% in a matter of months,”. The latest inflation report reveals the impact of a tight labour market on wage growth and inflation pushing back some speculation of imminent BoE rate cuts.

Still to come this week are UK, Eurozone and Japanese GDP for Q4 2023, UK and US retail sales, as well as US industrial production.

Kate Mimnagh, Portfolio Economist

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