Weekly Market Update- Week Ending 19/01/2024

Equity markets continued their sluggish start to the year with inflation figures once again dominating investor sentiment.

On Wednesday, the Office for National Statistics released inflation data for the UK. In the year to December inflation was 4%, up from 3.9% the month earlier and higher than economists were expecting (3.7%). It is the first time that inflation has increased since February last year with a rise in the prices of alcohol and tobacco more than offsetting the wider falls in food inflation. The increase in December mirrors similar moves seen in the US, France, and Germany.

My view on the matter is in line with the majority of economists; while the increase is unwelcome, this data doesn’t change the wider downward trend in inflation. It is forecast to continue to fall in the months ahead, and the news that the energy price cap could see a sizable fall in April certainly adds support to this view. Investors’ expectations for the timing of the first-rate cut have, however, reset following the release of the data. Having looked nailed on, a 0.25% reduction in May from 5.25% to 5%, now looks more balanced.

The big known unknown (citing Donald Rumsfeld’s infamous quote) is what happens in the Middle East in the months ahead. If geopolitical tensions escalate from here, the oil price (having been pretty well-behaved so far) could rise. In addition, shipping costs, having picked up in recent weeks, could climb further, adding more inflationary pressure.

John Naylor, Chartered FCSI – Head of Investment Committee