US HEADLINE INFLATION RISES BUT BOND MARKETS REMAIN FOCUSED ON RATE CUTS IN 2024

US HEADLINE INFLATION RISES BUT BOND MARKETS REMAIN FOCUSED ON RATE CUTS IN 2024

This week US headline inflation came in stronger than expected. A rise was on the cards but the increase was a bit bigger than forecast as higher energy and housing costs pushed inflation back up. Counter intuitively, particularly after the weakness in bond markets last week, US government bonds rallied slightly as markets looked past one inflation reading to focus on the bigger picture. Bond markets still clearly see rate cuts coming soon and it is going to take something more substantial than a single inflation print to shift opinion.

There was a similar reaction to the better GDP data in the UK. Against expectations, output increased 0.3% in November to offset the decline seen in October and make it possible that the UK managed to avoid a technical recession at the end of 2023. Higher services activity is encouraging, but one month’s data is not enough to improve the general outlook for the UK economy, particularly when seen in context of weak general retail spending over Christmas. Higher domestic energy costs coming through this month will also make any further slowdown in inflation harder.

BONDS: INVESTORS LOOK TO INFLATION AS A GUIDE FOR INTEREST RATES

Bond markets were more muted this week as investors waited for the outcome of the latest US inflation reading on Thursday. The update shows core inflation remaining stubbornly high at 3.9%, in line with expectations. However, headline inflation (including food and energy prices) increased to 3.4%. This increase was bigger than expected and caused some volatility in US government bonds.

UK and European government bond yields have increased slightly as markets pause following the end of year rally and push back their expectations for rate cuts. Members of the US Federal Reserve and the European Central Bank have been attempt to dampen enthusiasm for early rate cuts in their comments this week. Meanwhile, despite some concerns about rising levels of government debt, demand for new bond issuance remains high. Spain, Belgium, the UK, Italy and the US have all seen their new bond issues oversubscribed as investors attempt to lock in higher rates.

UK: EMPLOYMENT MARKET COOLS AS RECRUITERS REPORT LESS DEMAND

UK hiring has fallen as businesses become more cautious. The uncertain outlook means businesses have prioritised temporary jobs over permanent hiring, but the Recruitment and Employment Confederation says temporary hiring is now also slowing and the number of total vacancies continues to decline. Starting salaries increased in December, but this was only a modest rise. Figures from the Office for National Statistics also show job vacancies have dropped – although they remain above pre-Covid levels.

The weakening jobs market is reflected in updates from recruiters Hays and Robert Walters. Both saw revenues decline in the final three months of 2024 as Hays reported a clear slowdown in global recruitment. Its half year revenue fell 10% and it cut its profit forecast. Robert Walters reported a 10% decline in revenues in its final quarter but said full year profits are in line with expectations. The drop in recruitment generally, and in the UK particularly, caused shares in UK-listed recruiters to give back some recent gains.

RETAIL: SUPERMARKETS CELEBRATE XMAS BUT SHOPPERS TURN CAUTIOUS

The UK’s supermarkets are emerging as some of the biggest beneficiaries from Christmas. Sainsbury’s and Tesco released positive trading updates showing food sales increased around 10% in December. Marks & Spencer also reported positive trading as overall sales were up 7% compared with last year. All the retailers reported strong demand for premium foods. Big discounts from the supermarkets also drove higher sales. Shares in all three companies fell this week after rising strongly in the last 12 months.

Despite these positive updates, the overall tone from retailers has turned more negative. According to the British Retail Consortium, total retail sales grew by 1.7% in December. This is considerably behind inflation and well below the 6.9% growth recorded in December 2022. Although food sales are rising, the recent decline of non-food sales accelerated. Non- food sales fell 1.5% for the three months to the end of December. Overall, non-food sales fell 0.1% in 2023 and the BRC expects lower consumer demand in the first quarter of this year.