There’s a Kind of Hush
An eerie calm descended on the markets last Friday as traders headed home for the weekend after a week weighed down by data. For most of us, the UK’s economic health check was undoubtedly the area of most interest. Although it appears that inflation has peaked, admittedly at five times the Bank of England’s target level, there are still worrisome inductors. Wage increases and demands are at troublesome levels and could lead to inflation staying stubbornly high and becoming ingrained in the economy. With an economy seemingly flatlining and flirting with recession, as shown by December’s disappointing retail sales, the Old Lady of Threadneedle Street faces a conundrum of whether they stick or twist on interest rates. Any further dithering by the MPC on interest rate rises when it meets in the first week of February will almost certainly result in a slide in the pound’s value, which will import more inflation. Whilst a 50bp upward move is expected, we can only wish they had been braver bankers last year and worry that they will wave another white flag and move by only 25bp.
There is no such shyness from the ECB or the Fed regarding interest rates. The ECB almost sounded like an old vinyl record with a scratch last week, with council member after council member stating that interest rates are set to rise by 50bp. The minutes of the December ECB meeting also confirmed the growing influence of the hawks amongst the rate-setters, as did Christine Lagarde when she spoke at Davos. The comments have helped underpin the single currency against both sterling and the dollar; unusually, the euro has your humble scribe as a fan. Despite the continuing hawkish comments from the Fed members, most notably Lael Brainard, the dollar has continued to slide. The economic data increasingly paints a picture of an economy heading into recession, and thoughts now turn away from rate hikes to rate cuts. With the Fed consistently signalling higher for longer, the markets look as if they have got ahead of themselves in their expectations in this regard, and the dollar seems somewhat oversold. As predicted, last week saw some extraordinary volatility in the yen after the Japanese central bank did what they like to do most, nothing. I certainly breathed a sigh of relief as, thankfully, I have escaped explaining how their favoured measure of monetary tinkering, yield curve control, works!
Onto the week ahead, where a sense of calm should prevail ahead of what promises to be a momentous first week of February. With the long Chinese New Year holiday effectively closing the Asian markets, the volume will be lighter than usual. Adding to the calm will be the Fed, who entered their quiet period on Saturday, and the ECB, who will do so tomorrow. But as always, there is data on the docket to digest with the advance GDP for the final quarter in the US, along with personal income and consumption data and the Fed’s favoured measure of inflation, the Personal Consumption Indicator. Closer to home, preliminary Purchasing Managers Indexes are published on Tuesday, and the Producer Price Index is scheduled in the UK for Wednesday.
Finally, I am dropping a little plug for not only the weekly podcasts that we are involved in but also for a new format, a panel game called Trading Blows featuring three other analysts and myself, which promises to be both informative whilst staying light-hearted. It’s being hosted by our friends at Pepperstone and recorded next Wednesday,
Have a good week, and to our Chinese readers Gong Hei Fat Choy.