RISING INFLATION ERODES HOPES OF AN EARLY INTEREST RATE CUT

This week the slight tick upwards in inflation and the weight of combined warnings from the world’s central bankers added to the cautious mood in 2024. Equities and bonds have given back a little more of their recent bumper gains as some investors consider whether enthusiasm for rate cuts is overdone. However, market movements this week seem to be more about timing than the overall picture. Wage growth continues to slow and lower energy and food costs are likely to keep headline inflation moving downwards. Falling retail sales adds to the picture of economic slowdown in the UK and Europe and rate cuts are widely expected later this year.

In contrast, tumbling Chinese equities are part of a longer-term trend. China’s growth rate is poor by its own standards and its property sector remains mired in problems. The drop in retail spending is also a concern as developing its domestic economy is a long-term goal. The government has so far avoided big stimulus programmes but it seems a significant change is needed to revive domestic and international confidence.

UK: INFLATION FEEDS CONCERN THAT RATE CUT SPECULATION IS OVERDONE

UK inflation unexpectedly increased as higher taxes on tobacco helped push the Consumer Prices Index up to 4% in December. Core inflation was also more resilient then expected and remained unchanged at 5.1%. German inflation increased in December as the government ended support for energy bills and Eurozone inflation accelerated last month. The increases were small, but the end of the recent downward trend surprised investors as government bonds and UK and European equities fell.

Central banks have been trying to cool market expectations about interest rate cuts. Many central bank decision makers have taken the opportunity to air their views at the World Economic Forum this week. Almost all said rate cuts in the first half of the year are unlikely. This helped the dollar appreciate against the pound and the euro. Meanwhile other data in the UK points to the economy slowing. Average wage growth slowed from 7.2% last month to 6.6% and the number of job vacancies continues to decline sharply.

CHINA: EQUITIES SLIDE AS DATA SHOWS ECONOMIC PROBLEMS PERSIST

Chinese GDP increased by 5.2% last year. This is slightly above the official target of 5% but is considerably below the long-term average. The country has struggled
with weak demand from domestic consumers, lower demand for exports and its property sector is deeply troubled. Data this week shows these problems all remain. Retail sales in December were well below expectations and deflation is becoming a greater issue as CPI inflation was negative for the third month. House prices also fell in December as buyers remain cautious.

The weak economy means investors continue to shun Chinese equities and domestic and internationally traded Chinese stocks have continued their recent decline. The domestic CSI 300 Index of large companies has fallen more than 40% from its peak in February 2021 to its lowest level in almost five years. The Hang Seng index of shares traded in Hong Kong has also fallen steeply and is now trading at a level last seen in 2009.

HOUSING: PRICES FALL SHARPLY BUT SOME SIGNS OF OPTIMISM EMERGE

Higher mortgage rates in 2023 contributed to house prices falling at the fastest rate since 2011. According to the Office for National Statistics average UK house
prices fell 2.1% in the year to November. Poor sentiment and higher borrowing costs means buyers numbers are low. Sellers are also cautious as the number of properties for sale remains well below pre-Covid levels.

Despite falling prices, the outlook for the UK housing market is improving as estate agents report increased interest from buyers as mortgage rates fall. The Royal Institution of Chartered Surveyors says new sales instructions are increasing as falling mortgage rates bring buyers back. It expects the decline of house prices to slow over the next three months before stabilising later this year. Meanwhile, the Bank of England reports the rise in the number of mortgages in default has slowed and banks expect demand for mortgages will increase following two quarters of lower lending.