Economic Highlights

The headline-grabbing release of the last week was the inflation figure for December 2021, with the headline Retail Price Index rising by 5.4% year-on-year, the highest level since March 1992. Although food price inflation was a primary driver as expected, the surprise was that prices of clothing, footwear and furniture also rose, bucking the usually weaker seasonal trends. This could be on account of supply chain disruption and therefore be temporary, but we will have to wait and see. We also know that raw material costs have been rising. And the worst is yet to come, when the energy price cap is lifted again in April 2022. Retail Sales are already under pressure, with December’s falling 3.7% from November, well below an expected fall of 0.6%. Omicron and “Plan B” will have had an impact, and we were already aware that spending had been pulled forward by fears of supply chain-driven shortages and Black Friday sales. But these were still poor numbers, and we doubt that traditional January sales will have their historical positive impact. Even so, the Bank of England remains on course to raise the base rate again on 3 February 2022. Investec Bank’s economics team have now added an extra rise of 0.25% to their expectations of similar rises in February and May, taking the base rate to 1% by the summer, with a further 0.5% rise pencilled in for 2023. The team now sees a peak headline inflation rate of 6.2% in April, assuming some government-funded mitigation of energy cost increases. The latest PMI readings were disappointing, with the Composite Index falling from 53.6 to 53.4, but they remain consistent with recovering growth.

There was little new news last week, which left everyone focused on the weakest data point to emerge, which was the Empire Manufacturing survey, where the current reading fell sharply from 31.0 to -0.7 (vs an expected 25). There was also an uptick in the weekly Jobless Claims figure, from 231k to 286k. It is quite plausible that this weakness was attributable to the spread of the Omicron variant rather than higher inflation or concerns about imminent monetary policy tightening. Data from the housing market was more robust, with Building Permits and Housing Starts above expectations in December, possibly boosted by unseasonably mild weather (which will not be the case in January). Existing Home Sales came in below forecasts, but mainly on account of a lack of supply of homes for sale.

The latest PMI data from the eurozone was relatively encouraging, all things considered. The Manufacturing index actually rose from 58 to 59 against an expected fall. Services did dip from 53.1 to 51.2, but that was close to forecasts and hardly surprising given Omicron and tighter restrictions. The good news is that these readings remain consistent with economic growth, and this will be important to drive corporate profits higher in the face of some downward pressure on equity valuations.

The central bank continued to cut interest rates last week, with a 10 basis point reduction in the 1-year loan prime rate to 3.7% and a 5bp cut in the 5-year rate to 4.6%, the first move since March 2020 for the latter. This will help to push mortgage rates down, providing some support for the residential property market.