Economic Highlights

The Bank of England left the Bank rate unchanged at 5.25%. However, even while pushing back against imminent rate reductions, the Governor sent hints that the next move will, indeed, be a cut. The futures market agrees, and suggests that this will happen in June, with more thereafter – it is pricing in almost four quarter-point cuts by the end of the year. Even so, two members voted for an increase (with one for a cut), and so the committee is by no means unanimous. Good news on the inflation front too, in that the Bank now expects it to hit the 2% (headline) target as soon as Q2 2024 (from Q4 2025 previously), although base effects mean that it will rebound from that level later in the year. The expectation of falling rates has helped to push bond yields lower, and this has fed through to mortgage rates. Mortgage Approvals ticked back above 50k in December.

The US posted very strong job creation data, with non-farm payrolls growing at 353k in January versus a forecast of 185k. There was also a chunky revision to December’s number (+117k). Looking in more detail, there was debate about the underlying strength owing to a 211k rise in the number of respondents reporting themselves to be working part-time in the household survey (which is usually deemed to be a sign of weakness), and there were also some seasonal population adjustments. The unemployment rate remained at 3.7%, and this was ultimately viewed as strong. There were also weather-related effects in the main body of the survey, with as many as 40k jobs not being created owing to the January storms, a factor that also seems to have contributed to average weekly hours worked falling from 34.3 to 34.1 and thus average weekly hourly earnings jumping by 0.6% month-on-month versus an expected +0.3%. With so much noise in the data, it might be worth waiting a month to see if things normalise rather than jumping to immediate conclusions. Even so, it did prompt some shifting in interest rate predictions, with Bank of America notably pushing out its call for the first rate cut from the Fed from March to June. And that is what the futures market is saying too.

Eurozone GDP for Q4 2023, and the whole year, illustrated a stagnant situation with quarterly growth flat and annual growth of just 0.1%. At least the 0% in Q4 ensured that the region did not attract “recession” headlines. In contrast to some of the fairly recent past, Germany and France are the laggards owing to their exposure to higher energy prices and a global manufacturing downturn. Meanwhile, southern European countries are doing rather better. That should exercise the policymaking brains at the European Central Bank. They have been pushing back on the expectation of early interest rate cuts because they fear higher inflation more than lower growth, but one wonders how long they could bear the pain.

No respite on the China front. The main recent data has been purchasing manager surveys which are marooned around the 50 level and so indicative of a sluggish economy. The “official” series has Manufacturing at 49.2 and Services at 50.7. The (private sector) Caixin series has Manufacturing at 50.8 and Services at 52.7. With the Chinese New Year celebrations starting next weekend, the data will be less reliable than usual for the next few weeks.