Core work-out?

Weekly update
  • Weekly market update
  • 5 minute read

A good week for

  • Europe was the best performing equity region, gaining c. +2% in sterling terms
  • UK equities gained c. +1.5%

A bad week for

  • Bonds broadly declined, led lower by UK gilts
  • Yen weakness dented the performance of Japanese equities

UK inflation

UK inflation fell by more than expected in January. Year-on-year inflation was 10.1%, down from 10.5% in December, while core inflation measured 5.8% (down from 6.3%). Inflation continued to moderate in the categories of the CPI basket most exposed to global factors. Fuel price inflation slowed from 11.5% in December to 7.7% in January. Moreover, the recent falls in oil prices suggest it will approach 5% in February. Core goods inflation also fell, reflecting global trends. However, some parts of the basket showed surprising strength. Food price inflation remained unchanged at 16.8%, its joint highest rate since September 1977. Falling headline inflation reduces the pressure on the Bank of England’s Monetary Policy Committee (MPC) to continue raising interest rates.

UK labour

While falling inflation is welcome to the MPC, continued labour market tightness remains a concern. Last week’s labour market report included some signs that the labour market is easing, though unemployment remains low at 3.7%. Firstly, trends in participation, which fell in the wake of the pandemic, show signs of reversing. A decline in inactivity increased the workforce by 119,000, with falls in the number of workers who have retired early and who are on long-term sick leave. Higher living costs may be bringing these workers back to the labour market. Redundancy notices also increased to almost 10,000 in the week ending 29th January, the most for two years. While headline pay accelerated, excluding bonuses, the annualised growth in private-sector wages on a rolling 3m/3m basis declined to 6.9% in December, from 7.5% in November. A slowdown in the labour market would give the MPC confidence in ending monetary tightening.

US inflation

Across the pond, US inflation came in stronger than expected in January. Year-on-year, CPI slowed to 6.4%, down from 6.5% but ahead of economists’ expectations. Core inflation was also stronger at 5.6%, down from 5.7% in December. The strength was mostly attributable to higher energy prices, which had been a negative contributor to CPI in prior months. However, while energy prices continue to decline, household utility prices increased. Looking at the core services component of CPI, which is of greatest interest to the Federal Reserve Open Markets Committee as it is most reflective of wage growth, this component was depressed by a fall in the cost of health insurance, which is unlikely to be repeated.

Japan economy

Japan reported a small rise in GDP in the last quarter of 2023, avoiding recession. After GDP fell by 0.2% quarter-on-quarter in Q3, the economy grew by 0.2% in Q4, weaker than economists had expected. While the easing of Covid-19 restrictions allowed consumption to recover, rising 0.5% in Q4, business investment and inventory investment contracted, pulling down growth. As a popular tourist destination with Chinese visitors, Japan should benefit from China’s reopening but its manufacturing sector may suffer from a global downturn in goods demand, making recession possible. Nonetheless, the Bank of Japan is expected to continue to tighten monetary policy, with a new Governor to be appointed to the Bank. The government formally nominated Kazuo Ueda as the next Governor at a session of the Diet and, while his views on monetary policy are not yet well understood, the Yield Curve Control policy is becoming increasingly burdensome for the Bank to implement.

Eurozone economy

The second estimate of Eurozone GDP growth in the fourth quarter of 2022 pointed to a significant decline in household spending due to high inflation. Quarter-on-quarter growth was revised down modestly to 0.4% in Q4. Among the main countries of the region, Germany and Italy contracted while France and Spain grew. Overall, the headline GDP growth print is flattered by a surge in the Irish economy, due to Irish-registered companies. Excluding Ireland, Eurozone growth would have been modestly negative. Labour market data also shows signs of easing. Official Eurozone data showed a rise in employment and a further decline in unemployment last quarter. However, monthly data already showed the number of unemployed up slightly in November and December.


Important information
The information contained in this article is believed to be correct but cannot be guaranteed. Past performance is not a reliable indicator of future results. The value of investments and the income from them may fall as well as rise and is not guaranteed. An investor may not get back the original amount invested. Opinions constitute our judgment as at the date shown and are subject to change without notice. This article is not intended as an offer or solicitation to buy or sell securities, nor does it constitute a personal recommendation. Where links to third party websites are provided, Close Brothers Asset Management accepts no responsibility for the content of such websites nor the services, products or items offered through such websites.


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