Week in Review: U.S. Inflation Offers a Mixed Picture

On a year-over-year basis, inflation increased by 6.4%, higher than expected but at its slowest pace since October 2021. Annual core (less food and energy costs) inflation was 5.6%, also modestly above expectations but its slowest pace since December 2021. Housing accounted for nearly half of the increase.

At the same time, U.S. retail sales rose in January by the most in almost two years (see Chart of the Week below), and separate measures of manufacturing and building activity also came in better than expected. Combined with Tuesday’s inflation report, figures reveal an economy that is generally performing better than expected, increasing the odds that the Federal Reserve will keep raising rates for longer.Geopolitical tensions between the U.S. and China continue to escalate, following the shooting down of an alleged Chinese spy balloon. China imposed fines and sanctions on two U.S. defence companies. Lockheed Martin and a subsidiary of Raytheon were added to a list of “unreliable entities” for selling weapons to Taiwan. The Biden administration said it suspects that three unidentified objects downed since last Friday served commercial purposes, not espionage, a judgment that may help ease anxiety over the alleged Chinese spy balloon that traversed the U.S. before being shot down.European government bond yields headed toward recent multiyear highs due in part to hawkish comments from European Central Bank (ECB) policymakers. ECB President Christine Lagarde reiterated that interest rates would need to increase to control inflation.

In the UK, consumer price growth declined for a third consecutive month in January to 10.1%. Core inflation (excluding energy, food, alcohol, and tobacco) also eased to 5.8%. The slowdown in inflation increases the odds of the Bank of England downshifting to smaller interest-rate increases in March.Meanwhile, the UK job market remained strong, with the unemployment rate remaining just off an all-time low at 3.7%, in line with expectations. Retail sales advanced in January by 0.5%, compared to expectations for a decline, as online sales, driven by holiday discounts, and falling average fuel prices boosted the monthly number.China ramped up its support for its economic recovery, seeking to ease a squeeze in bank borrowing costs. The People’s Bank of China (PBOC) added a net 632 billion yuan into China’s fiscal system, its biggest ever cash injection, offering a short-term cash boost to lenders on Friday, after having just pumped one-year money into the system earlier this week.

Bloomberg reported that prices for new home sales in China remained roughly steady in January, breaking a 16-month slide, as demand received a boost from the government lifting of its zero-COVID regime. In recent months, Chinese authorities have rolled out a slew of support measures for the struggling sector as it focuses on restoring economic growth in China.Japan’s economy rebounded less than expected in the final quarter of last year, expanding at an annualised rate of 0.6% in the fourth quarter of 2022, following a contraction in the third quarter.Portugal announced that it will be ending its golden visa program for wealthy foreign property buyers as it tries to address a lack of affordable housing in the country. Chinese nationals accounted for almost half of the residency permits sold under the program.

It was a mixed week for global equity markets. U.S. and Asian markets were generally softer, whilst European markets posted positive gains. In the U.S., the Dow Jones (-0.13%) and S&P 500 (-0.28%) ended the week mildly negative, compared to the Nasdaq (+0.59%) which was positive. In Asia, the Nikkei 225 (-0.57%), Hang Seng (-2.05%) and Shanghai Composite Index (-1.12%) were all negative, compared to positive gains from the Euro Stoxx 50 (+1.83%) and FTSE 100 (+1.65%).

Market Moves of the Week:

South African headline inflation fell to 6.9% in January, in line with expectations. Core inflation (excluding energy & food) remained unchanged at 4.9% (year-on-year), below expectations. At the same time business confidence dropped to a level of 112.90 in January, compared to a level of 117.30 in December 2022.The JSE All-Share Index (+0.32%) posted modest gains this week, driven higher by the industrial (+1.47%) and financial (+0.90%) sectors, whilst the resources sector (-2.07%) was weaker as commodity prices came under pressure. By Friday close, the rand was trading at R18.03 to the U.S. Dollar, depreciating by +0.64% for the week.

Chart of the Week:

U.S. retail sales rose in January by the most in almost two years, reinforcing the narrative that consumer demand remains strong. The 3.0% total retail sales growth for the month matched the highest estimate in a Bloomberg survey of economists, which had a median forecast of 2%. Consumers’ appetite to keep buying may bolster the Federal Reserve’s resolve to maintain its aggressive monetary tightening campaign.Source: Bloomberg; U.S. Department of Commerce.