Weekly market review: UK inflation hits lowest level in three years

With a number of retailers set to report next week, could we see further lackluster retail figures?

Article updated: 19 January 2020 10:00am Author: Tom Rosser

Review: 13 – 17 January 2020

This week saw a number of interesting data points coming from several nations. US inflation appeared to come back to life in 2019 – rising 2.3%, the highest number since 2011. Major contributing factors for the moderately high inflation were thought to be higher fuel prices and increased shelter costs. However December inflation fell slightly below consensus estimates – meaning the Fed are likely to continue with their ‘on hold’ rate policy. On the other hand, UK inflation eased to 1.3%, its lowest level in more than three years, slipping further below the Bank of England’s 2% target as prices at hotels, restaurants and some clothing stores fell.

Elsewhere, figures showed China’s economy grew at the slowest rate since 1990 last year as the economy groaned under pressure from rising unemployment, weak consumer spending and difficulties in the banking system. These results came in a week which saw the signing of a preliminary trade agreement between the US and China. This signifies a temporary truce in the two-year-long skirmish with markets appearing to react positively as the Wall Street trio closed at record highs on Thursday.

However, the damage elsewhere appears to have been done, with Germany’s economic growth slowing to its lowest rate in six years. The tepid GDP growth of 0.6% was undoubtedly influenced by global trade tensions, especially as China is Germany’s most important trading partner. A slower China means a slower Germany. Arguably, there are other factors at play such as export weakness and a spluttering automotive industry – but the effects of the Trump-imposed tariffs are far reaching and somewhat destructive.”

The Week Ahead: 20 - 27 January 2020

Next week’s January PMI flashes will give a preliminary indication of whether the turnaround in fortunes we saw at the end of last year in many nations can be sustained. The UK’s results will be closely observed by the Monetary Policy Committee (MPC). A significant improvement in the composite flash PMI would probably see the Bank hold rates unchanged. However, a further deterioration or no significant pick-up from the contractionary territory we see ourselves in will surely prompt a response. Couple this with retail sales, which have failed to grow for five consecutive months, and persistently low levels of inflation then you have more pieces of the puzzle all pointing towards a rate cut. With options now pricing in a near 75% chance of a rate cut at the end of month meeting, I think it’s time the BOE listens to what the data is saying.

We also see the continuation of earnings season in the US and UK where investors hope company profits rather than increased market liquidity will drive stock prices this year. In the UK earnings are expected to be reported from a number of retailers such as; Dixons Carphone, Burberry and ASOS. With the lacklustre December retail sales figures in mind it will be interesting to see how these companies have fared.

Tom Rosser

Investment Research Analyst

Tom holds a BSc Economics degree and an MSc Investment Management degree, and has passed both CFA Level l and CFA Level ll. He joined The Share Centre in September 2018 on the graduate scheme and is now an Investment Research Analyst on the fund research team. As well as being a fund commentator, Tom also comments across equities and other asset classes.

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