Last week brought a much-needed reprieve for investors after a turbulent start to the year. Economic and geopolitical developments provided a boost to asset prices,with government bond yields falling,corporate credit spreads tightening,and both commodity and stock prices on the rise. This shift in momentum was driven by several key factors across global markets.
UK Inflation Eases, but Challenges Loom
In the United Kingdom, headline consumer price inflation fell from 2.6% to 2.5% in December, slightly below the consensus estimate of 2.6%.This decline was primarily attributed to weaker services inflation, a critical metric for the Bank of england (BoE), which dropped from 5% to 4.4%. Lower prices for airline tickets and accommodation services were the main contributors to this trend.
However,this disinflationary trend may be short-lived. A projected rise in household energy bills this spring could push inflation closer to 3%, well above the BoE’s 2% target. Despite this, concerns about the UK economy—evidenced by disappointing monthly GDP, industrial production, and retail sales data—have strengthened the case for a 25 basis point rate cut by the BoE in February.
US Disinflation Resumes, but Energy Costs Remain a Concern
Across the Atlantic, US headline inflation rose 0.4% in December, marking the fastest monthly increase as March 2024. Annual headline inflation reached 2.9%, driven largely by energy costs, with gasoline prices up 4.4% and natural gas prices rising 2.4%.
Yet, the focus for investors has shifted to core inflation, which rose just 0.2% in December—the first decline in six months. On an annual basis, core prices fell by 2.9%, supported by cheaper hotel stays, slower increases in medical services, and stable rent prices. The Federal Reserve is likely to welcome these signs of resuming disinflation, though it remains cautious about potential headwinds, including rising energy prices and the impact of wildfires on housing costs. Investors, however, are optimistic, pricing in two rate cuts for 2025, with the next expected in June.
China’s Recovery Faces Tariff Headwinds
In China, the economy grew by 5.4% in the fourth quarter, the fastest pace in six quarters, allowing the government to meet its 2024 growth target of 5%. This rebound was largely driven by policies aimed at boosting consumption and manufacturing investment, with export shipments also playing a meaningful role.
However, concerns linger as US President-elect Donald Trump’s administration prepares to use tariffs as a negotiating tool. Reports suggest a gradual implementation of universal tariffs, with monthly increases of 2% to 5%, aimed at minimizing the impact on consumer prices while strengthening the US negotiating position.
Middle East Truce Offers Hope
a glimmer of hope emerged from the Middle East, as Israeli Prime Minister Benjamin Netanyahu announced an agreement with Hamas to end the conflict in Gaza. Outgoing US President Joe Biden emphasized the importance of a permanent resolution, which could stabilize the region and strengthen diplomatic ties between Israel and Arab states, including Saudi Arabia.
Chart of the Week: Will the BoE Cut Rates in February?
The table below summarizes key economic indicators influencing the BoE’s potential rate cut decision:
| Indicator | December Data | Trend |
|————————–|——————-|————————–|
| Headline Inflation | 2.5% | Down from 2.6% |
| Services Inflation | 4.4% | Down from 5% |
| Monthly GDP Growth | Below Expectations | Weak |
| Industrial Production | Below Expectations | Weak |
| Retail Sales | below Expectations | Weak |
As global markets navigate these developments, investors remain cautiously optimistic, balancing short-term gains against longer-term uncertainties.
