Newsflow over the past week was dominated by central banks as they continued to tighten monetary policy in their ongoing fight against inflation. Perhaps most importantly for global markets, the US Federal Reserve ("Fed") increased its funds rate by 0.25% to a target range of 4.5 - 4.75%, marking the 8th increase (albeit the smallest rate of increase) since March 2022. The Bank of England and the European Central Bank both read from the same script and followed suit, each raising their benchmark lending rates by 0.5% (to 4.0% and 2.5% respectively).

In the US at least, markets arguably place more significance on the post-meeting statement than the decision itself and as ever they hung on every syllable, desperately looking for a clue on the Fed's view of the likely path for inflation. Markets whipsawed with the bellwether S&P 500 Index falling as much as 1% at one point as it heard the messages that inflation "has eased somewhat but remains elevated" and there is a need for "ongoing (rate) increases". The index later rallied sharply to close around 1% higher following the post-statement press conference in which Fed Chair Powell uttered the five magic words "the disinflationary process has started".

Chairman Powell may have gone on to caveat that it would be "very premature" to declare victory over inflation, but the markets may not have been listening by this point as the word "disinflationary" was still ringing loudly in its ears. If markets chose to turn a blind eye to Chairman Powell's caveats, they could not ignore Friday's non-farm payrolls report, which confirmed that the US added 517,000 jobs in January - a staggering number compared to the 185,000 that had been expected by a consensus of Wall Street economists. The unemployment rate also fell to a 50-year low of 3.4% and to top it all off average earnings also increased. Friday's employment data poured cold water on the market's optimism over disinflation and swung the pendulum back toward the need for more rate hikes in order to try to loosen the tight labour market.

As for equity markets, a casual bystander could be forgiven for looking at a 6.3% increase in the price of the S&P 500 during the month of January and thinking that all is rosy in the garden. The reality is that weakening economic data is pointing to imminent recession on both sides of the pond. Whilst the Bank of England this week appeared to soften its projections, it still expects to see five full quarters of recession in the UK. Consensus earnings expectations for the S&P 500 as a whole for calendar year 2023 are now some 2.5% lower than they were just over a month ago on New Year's Eve, with nine of the market's eleven sectors seeing earnings expectations for the year being reined in. A combination of falling earnings expectations and increasing prices means the S&P 500's prospective price to earnings ratio has expanded to 18.4x from 16.7x at the turn of the calendar year. Equity markets are either turning a blind eye to what is staring them in the face, or they are looking ahead to what they hope are happier times in 2024 and beyond.