Week ending 27th January 2023.

Hopes for a soft economic landing (in other words where economic growth is slowed to help reduce inflation without triggering a recession – just like when an aircraft touches the runway in a nice gradual and smooth way), were helped this week by stronger than expected PMI (please see here) and GDP data releases, coupled with lower natural gas prices, which dropped to $2.85, its lowest level since June 2021.

Although US Q4 GDP decelerated to an annualised rate of 2.9% from 3.2% in Q3, it comfortably exceeded economists’ expectations of just 2.6%.  Together with weekly US jobless claims, which dropped to 186,000 from 190,000 and better than expected US durable goods orders (which are items such as cars, computers, office furniture and household appliances like washing machines and fridges), paints a picture of an economy that is slowing, but still growing.

While very positive, on the flip-side this could potentially reduce the chances of the Fed moving to smaller interest rate increases.

However, while on the surface this week’s economic data was like Goldilocks’ porridge, in that it wasn’t too hot or too cold, looking at the detail of the GDP data suggests that the growth was mainly driven by inventory build-up and exports, while the contribution from household consumption was minimal – a clear sign that inflation and higher debt servicing is reducing Americans’ budgets (just as it is in the UK).

As a result, we still wouldn’t be surprised if Fed policymaker’s continue to slow the pace of its interest rate increases by only increasing interest rates by 0.25% next week, and more importantly, look at reducing interest rates before the year is out.

Consequently, our focus this coming week will be firmly on Wednesday’s (1 February 2023) Fed monetary policy meeting, followed by the BoE’s & ECB’s meeting on Thursday, US employment data (non-farm payrolls; unemployment rate; participation rate; and average earnings) on Friday.

Elsewhere we have Eurozone Q4 GDP, Eurozone CPI inflation, US ISM, Chinese PMI and Japanese industrial production.

Investment Management Team