In the last few weeks markets have been whipsawed by data that was not in accordance with the trend of the data preceding it, nor in line with analysts’ expectations of what that data print should have been. This either points to unusual or unpredictable market behaviour or poor methodologies in predicting data points.
The first big data point- and by far the most important, was the surprising jump in the US inflation print that came up on 13th February. At 3.1% the January Consumer Price Index was slower than the December print of 3.4% but higher than the market expectation around 2.9%. Whilst this still shows an overall declining trend the market was caught on the wrong foot since they had been anticipating the death of inflation and the clear sighting of a rate cut timetable by the Federal Reserve. All the indicators were above forecasts and this instantly translated into a bond and equity market sell-off. And, because of the structural importance of the US Dollar in global financial markets- global equities all traded sharply lower on the news.
The key component in the data was the annual core inflation number which remained steady at 3.9%- against expectations of a 3.7% print. The monthly number saw an uptick to 0.4% from a December print of 0.3% and an expectation of a repeat performance. Core inflation data is the favoured measure of inflation that the Federal Reserve pays a lot of heed to- much more than the CPI which gets more publicity and gets quoted much more.
Although this narrative has forced a rethink amongst market participants about the timing of the first rate cut by the Federal Reserve it really doesn’t involve the Fed itself having to backtrack on any statements and certainly not on any commitments to cut rates. The Fed Chairman, Jerome Powell, has gone on record stating that the Fed were conscious of the fact that the last mile of inflation reduction was usually the stickiest and that they hadn’t changed their target rate of 2%. In other words, they were not going to commence a rate-cutting programme until they had clear evidence that inflation was on a definitive trajectory to hit 2%- which is why the probability of the first US rate cut in March has disappeared and resurfaced in May at the earliest. Larry Summers, one-time Treasury Secretary, has gone so far as to say that investors should prepare for the possibility of rate hikes this year rather than rate cuts given the aforementioned stickiness of inflation.
That the UK was stagnant was no surprise and neither was the data that showed that the UK had just logged two quarters of negative growth- the technical qualification for a recession, when it was announced that Oct-Dec ’23 saw a 0.3% contraction in the economy (after a 0.1% contraction for the previous quarter). At first the blame was apportioned to lower consumer retail sales in December after a decent November. But this ended up being misleading since the January retail sales number- expected to be weak again, rose by 3.4% for the month of January- far exceeding the expectations of economists. In fact, this was the largest single month of growth since April ’21. December had seen a 3.3% decline in consumer spending. This upbeat number for January has sent the FTSE 100 from a post US inflation print of 7511 to a 4 day rally up to 7733 (a decent 3% jump). More importantly, it has caused economists to predict that the UK will pull itself out of recession soon as the effects of higher interest rates on spending diminishes. They are already predicting a year of growth as inflation cools, wages rise and interest rates fall. People are still confident of their ability to predict the future even immediately after being so badly wrong-footed.
At any rate, the contracting GDP numbers have prompted speculation that the Chancellor will be looking to axe public spending in order to make room for further tax cuts. This prediction may prove more accurate since that is probably the last significant act that the Tory Party will get to make before the General Elections this year. The wisdom of cutting public spending (a fiscal contraction) in a recessionary period in order to boost private investment ((through the tax cuts) is questionable since capital expenditure is likely to be delayed until further evidence of an economic recovery is embedded- something less likely if the spending taps are cut off. Tough decisions ahead for the Prime Minister and the Chancellor then.
Even the assessment of Chinese growth has been mixed or misread. The continuing gloomy news about the property market collapse (and how- like the Wuhan virus, it would ripple across the world) and the twin issues of the problems in their shadow banking industry and investors souring on China investment, is perhaps premature. The Year of the Dragon kicked off well as consumer spending on goods and travel promised a good economic bounce. Travel was up 34% on last year and 19% up on the pre-Covid 2019 New Year. Tourism spending in this period- the closest to Christmas spending in the West, was up a staggering 47% on the previous year even though only 8% up on pre-Covid spends. Policymakers are hoping that robust domestic demand will help lift the gloom surrounding the economy at the moment but it is certainly an auspicious start to the Dragon Year.
Forecasters have been getting caught off-guard quite frequently of late. This suggests that economies are facing economic uncertainty although consumer spending seems to be holding up rather well under these circumstances. The up/down nature is indicative of churn- not just of fortune but also of economies themselves. Both China and America are trying to change their economies to be less dependent upon each other. The UK, increasingly a less significant economy, is being tossed about without the economic ballast of the European economy and may face more volatility in its economic numbers. At any rate, we should be more prepared for more surprises ahead.