Weekly comment: US Inflation concerns

3 minute read

Weekly podcast – Market overview

This week’s host, Executive Director, Fraser Wilkinson is joined by Richard Carter, Head of Fixed Interest Research and Ollie Creasey, Head of Property Research. They discuss US inflation concerns, the UK’s recession outlook and much more.

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Market overview: Alan McIntosh, Chief Investment Strategist

Last week, the global financial landscape toyed between gains and inflation jitters, particularly evident in the US markets. The MSCI AC World Index notched a 0.4% uptick, reinforcing a year-to-date growth of 3.4% in dollar terms. However, the US markets painted a mixed picture as the US stocks dipped by -0.3%, marking its first weekly decline of the year. This decline is juxtaposed against some favourable earnings surprises, underpinning the delicate balance amid inflation concerns.

Large-cap growth stocks bore the brunt of the decline, whereas an equally weighted version of the US stocks soared to a record intraday high, showcasing the resilience within segments of the market. Even more notably, the small cap staged a remarkable rebound after experiencing its deepest daily drop since June, outpacing its larger counterparts for the week.

This trend was mirrored in the performance dynamics, with the US 1000 Growth Index returning -1.2% year-to-date, while the US 1000 Value Index posting a 0.9% gain. US tech stocks retreated by -1.3%, reflecting the sector’s vulnerability to inflationary pressures.

The market’s reaction to inflation data proved to be a pivotal narrative throughout the week. The Labor Department’s report on consumer prices revealed a 0.3% uptick in January, surpassing consensus expectations. More concerning was the 0.4% rise in core consumer prices, maintaining a year-over-year increase of 3.9%. Despite initial market turbulence, sentiments were buoyed by Chicago Fed President Austan Goolsbee’s reassurance that moderate inflation in the coming months aligned with the Fed’s target trajectory.

UK’s recession

Official data revealed that the UK economy stumbled into a recession in the final quarter of last year, with preliminary estimates showing a contraction of -0.3%. Simultaneously, January’s inflation figures mirrored December’s at 4.0%, failing to meet consensus forecasts. Core inflation – excluding volatile food and energy prices – stagnated at 5.1%, while services inflation accelerated to 6.5%.

These development reignited expectations of interest rate cuts as early as June. Bank of England (BoE) Governor Andrew Bailey played down those expectations, characterising the recession as “very shallow” and would “not put too much weight” on the recession. Instead, they would pay more attention to signs that activity would pick up at the beginning of the year.

Andrew Bailey highlighted recent indicators as signs of an upturn. These include the UK unemployment rate, which still stands at a lowly 3.8%, US January purchasing manager’s index – which offers a more up-to-date snapshot of business activity and GDP – showing a third straight acceleration in activity, and retail sales were up 3.4% in January, compared to the 1.5% expansion expected by economists.

The UK financial markets experienced notable movements, with the UK large cap stocks surging by 2.0% and UK mid cap stocks gaining 0.7%. Additionally, the British pound remained stable against the US dollar, maintaining its position at USD 1.26 for GBP throughout the week.