The UK’s FTSE 100 index broke through the 8,000 barrier for the first time last week, carrying on its momentum since the start of 2023. However, we should not lose sight of the fact that the FTSE 100 does not really represent the overall UK economy, as it is, of course, heavily weighted towards BP, Shell, mining stock and banks. All of which are benefiting from the reopening of China and likely resource demand that will come from that. To put it in perspective, the FTSE 100 stood at 6,335 on 30 January 2001 and its capital return over this period has been 26%. It is very welcoming to see the FTSE 100 at this level, however it is by no means a reflection of either the UK or global economy.

The UK’s Consumer Price Index ("CPI") fell for a third consecutive month in January to 10.1% due mainly to easing services and fuel costs. Core inflation eased to a much lower-than-forecast rate of 5.8%. The slowdown in inflation boosted hopes that the Bank of England might opt for a smaller interest rate hike in March or no rise at all. However, the jobs market remained tight in the three-month period between October and December 2022, with the unemployment rate remaining just off an all-time low at 3.7%. Pay rises, excluding bonuses, rose by 6.7% during the same period. This represents the fastest rate seen for more than twenty years.

Meanwhile, retail sales rose by 0.5% in January; the consensus estimate had anticipated a decline. Online sales, driven by holiday discounts, and falling average fuel prices boosted the monthly number. The annual measure, however, dropped 5.1%, declining for a tenth consecutive month.

In the US, the Labor Department reported that consumer prices rose 0.5% in January, as expected, versus a revised 0.1% increase in December. A “sticky” increase in shelter prices accounted for nearly half of the gain and compensated for another large drop in used car prices. On a year-over-year basis, the inflation rate came in at 6.4%, higher than expected but the slowest pace since October 2021. Annual core inflation was 5.6%, also slightly above expectations but its slowest pace since December 2021.

Bonds generated negative returns for the week as economic data seemed to confirm recent cautious comments from US Federal Reserve (“Fed”) officials that there was more work to do to tame inflation. As of the close of trading Friday, futures markets as tracked by CME Group began to price in an 18.1% probability that the Fed would hike rates by a half point (0.50%) at its March policy meeting, almost double the chance priced in the week before. The Fed slowed its rate increase increment to a quarter point (0.25%) at its meeting early in the month. The rhetoric from both sides of the Atlantic regarding inflation remains hawkish, however the reality might be softening.