18 January 2024
If you are covering the latest moves in financial markets, please find below a comment from Lindsay James, investment strategist at Quilter Investors:
“After a difficult day yesterday as a result of poor inflation data, stock markets have stabilised somewhat today. Investors will have likely come to terms with the fact rate cuts are not coming quite as soon as they first thought, and that we really are in a higher for longer scenario for now.
“That said, the economic data continues to paint a murky picture, with conflicting data points making the jobs of central bankers especially tough at the moment. For example, more firms are warning on supply chain disruption from ongoing Red Sea hostilities, and with the Covid induced disruption still fresh in the mind, this could see a return of inflationary pressures. Rolling manufacturing shut downs in Europe look likely, with disruption across numerous industries. Autos has been one of the earliest sectors to warn of disruption, although currently markets seem to be focussed on freight rates which although higher, are well below levels seen during covid. This is however likely to mask the significant operational disruption firms are likely to face in coming months, without a quick resolution.
“The fact that inflation is going to be lumpy at a time when economic growth is struggling, and supply chains susceptible to volatile geopolitics, energy prices, and protectionism and more polarisation in political policy help to highlight why the path back to 2% inflation will not be straightforward. The increasingly popular central bank policy of average inflation targeting is one outcome of this, underlining that the decades of easy money are over, even if interest rates are likely to be on the decline at some point this year.
“Yesterday’s market reaction to the inflation figures shows there are fears that inflation remains embedded in the economy. What gives us some reassurance is that by April energy prices under the price cap will be around 15% lower, whilst food prices are also seeing disinflation. Along with a weakening jobs market, which will reduce the impact of wage inflation over time, the path for inflation still looks significantly better than it did for much of 2023. Consumers and investors will need to be prepared for what will be a very bumpy ride.”
