- UK inflation slowed to 10.1% in the 12 months to January down from 10.5% in December adding further weight to expectations that price rises have peaked
- A sharp rise in US retail sales in January added to concerns that the US Federal Reserve may opt to maintain tightening monetary policy for longer.
Markets oscillated this week as investors processed mixed signals on the direction of interest rates on both sides of the Atlantic.
UK inflation slowed to 10.1% in the 12 months to January – a five-month low – down from 10.5% in December. This added further weight to expectations that price rises have peaked and boosted hopes of an early halt to further interest rate increases by the Bank of England (BoE)1.
However, a sharp 3% rise in month-on-month US retail sales in January added to concerns that the US Federal Reserve may opt to keep tightening monetary policy for longer to slow the US economy and curb inflation2. US inflation cooled to 6.4% in the 12 months to January, slightly down from 6.5% in December3.
US benchmark the S&P 500 ended Wednesday 0.3% higher while the UK FTSE 100 Index closed down 0.18% on Thursday. The FTSE 100 is up 7.53% year to date, while the S&P 500 has risen 7.30%4.
Figure 1: FTSE 100 year to date
US headline inflation is likely to continue to trend down on balance, but remain above target throughout this year at least, says Silvia Dall’Angelo, Senior Economist, Federated Hermes Limited. “Accordingly, in our base-line scenario, the Fed will implement a couple of additional 25bps hikes in coming months and will hold at a terminal rate of just north of 5% for the balance of the year.”
In the UK, Dall’Angelo added, a fall in core inflation to 5.8% in January, from 6.3% in December, offered encouragement. However, the BoE’s fight against high inflation is far from over and risks of second-round effects are acute, she warns, adding a downshift in the tightening pace to a 25bps hike at the next policy meeting at the end of March is likely. “The BoE will likely remain in tightening mode in the foreseeable future,” she adds.
Softer landing on the cards?
Louise Dudley, Portfolio Manager – Global Equities at Federated Hermes Limited, says the US inflation data adds weight to the positive outlook for US stocks for this year. “A softer landing appears more likely given the strong consumer data and expectation that wages will keep heading up as labour markets remain tight. The positive retail sales numbers contribute to expectations that the US market can ride out the monetary tightening,” she adds.
“We now expect lower quality names to deliver as the rally broadens. Industrials will benefit as costs come down. In the tech space, some of the semi names are seeing prices bottoming and are therefore leading those areas of the market higher on better expectations for the year to come. Earnings results have been weak overall, but much of it was priced in given the macro concerns.”
Investors can still see the bear market in the rear-view window, says Geir Lode, Head of Global Equities at Federated Hermes Limited, but their focus has shifted to the road ahead. “An unusually strong labour market will ensure a mild recession and strong equity markets. This year has seen a rotation from winner’s defensive to higher risk stocks. Our models indicate that sustainable stocks are selling at multi-year deep discounts to the overall market. A blend of strong financial characteristics and sustainability will perform exceptionally well in 2023,” he says.