Economic Highlights

Headline Consumer Prices again rose more than expected in January, this time by 5.5% year-on-year (core +4.4%). That’s a post-1992 high, but still only a staging post on the way to what is probably going to be more than 7 per cent in April. The labour market shrugged off Omicron in January, with unemployment steady at 4.1%. PAYE data pointed towards an increase of 108k in payroll numbers in January, but there are still 1.3m vacancies, another record high. A tight market carries the threat (in terms of even more inflationary pressures) of higher wages, but these were relatively benign, showing an increase of 3.7% (excluding bonuses), which is still negative in real terms. And although retail sales bounced nicely in January (volumes were +1.7% month-on-month), there is still a risk of weaker demand as the energy squeeze worsens with the price cap being lifted in April. Having said that, the latest Purchasing manager data was strong, with Services jumping from 54.1 to 60.8 (forecast 55.5) on the receding Omicron threat and loosening of restrictions. Price pressures continued to intensify, with the input cost index hitting the second highest reading on record. Labour shortages were also problematic, constraining growth in the manufacturing sector (57.3 – unchanged).

There were two notably better data releases in the US. Retail sales expanded by +3.8% month-on-month in January (vs +2.0% expected), the fastest monthly gain since March 2021, although we should also point out a downward revision to December’s figure. The figure excluding autos was up +3.3% (vs. +1.0% expected). Industrial production grew by +1.4% (vs. +0.5% expected). One thing worth keeping an eye on is the 30-year mortgage rate, which is the key rate in the US. This has risen from 3.2% to 4.2% since Christmas, which will take a lot of refinancing firepower out the market now that it sits higher than the average rate for the existing stock of mortgages.

February PMIs for the Euro area showed a rebound in activity with the Composite PMI rising to 55.8 from the 52.3 recorded in January. This was greater than expectations which had been for a figure of 52.7, it also followed strong outturns from France (57.4) and Germany (56.2), which were published earlier this morning. In terms of the sector breakdown, manufacturing maintained a robust pace of expansion at 58.4, although this was down 0.3 points from January’s reading. Services however saw a notable pick-up in activity with the PMI rising to 55.8 from 51.1, as it benefited from the easing of Omicron headwinds and a loosening of social restrictions. However one area of the report which continues to stand out is the inflation backdrop, with output prices rising to 62.7, a new survey high.

China left its prime interest rates unchanged, as expected. The National Bureau of Statistics reported its 70-city house price data. This showed that the average property price in the primary market rebounded in January after seasonal adjustments, mainly led by appreciation in tier-1 and tier-2 cities, while price declines in lower tier cities continued. The overall figure was +1.5% month-on-month. But to give you an idea of how flat the market has been in China, the year-on-year number is only +2.4%. One place where inflation is not a problem is China, with the Consumer Price Index up just 0.9% year-on-year in January. This was very much influenced by pork prices being down 41.6% year-on-year as the market recovers from a swine fever outbreak last year which killed half of the country’s pig population.