Market Update

Fortunately, the fuss about an impending surge in inflation, and subsequently, the tightening of monetary policy through higher interest rates, was short-lived.
As we've emphasized repeatedly in these Market Summaries, excluding the influence of distorted oil prices, global inflationary pressures remain subdued. Consequently, the likelihood of higher interest rates remains a distant prospect.
This realization became evident to financial markets this week, thanks to the US CPI inflation data and comments from Fed Chair, Jay Powell. Not only did the headline CPI inflation remain unchanged at 1.4% in January, but the core US CPI inflation rate, excluding volatile items like food and energy (considered a more accurate indicator of where headline inflation is heading), fell from 1.6% to 1.4%.
These figures clearly indicate that while oil prices surged (for instance, US petrol prices rose over 7% in January and 5% in December), these increases were offset by declining prices in other sectors. Consequently, the Fed is expected to overlook any temporary above-target inflation in the coming months, attributing it to last year's slump in oil prices factoring into year-on-year inflation calculations.
Jay Powell reaffirmed the Fed's dual mandate: managing inflation and employment. He stressed the Fed's focus on rebuilding US employment, necessitating supportive monetary policy for the foreseeable future. With US unemployment at 6.3%, far from a robust labor market (particularly considering the pre-coronavirus 3.5% unemployment rate), Powell's stance underscores the economic challenges.
This labor market weakness was evident in the recent jobless claims data, where both initial and continuing claims, while lower than the previous week, were impacted by upward revisions from last week's figures, indicating lingering challenges.
In the UK, the key development was the GDP data released on February 12, 2021. Contrary to some economists' expectations, the UK managed to avoid a double-dip recession, expanding by 1% in the final quarter of 2020 and growing by 1.2% in December. Although stricter lockdown measures introduced in December are likely to result in a contraction this quarter, the successful vaccination program and the prospect of gradual easing of restrictions point toward a robust economic recovery in Q2 and Q3.
Looking ahead to the upcoming week, US markets will be closed on Monday (February 15, 2021) for President’s Day. Additionally, the Chinese New Year public holidays extend until Wednesday (February 17, 2021). The notable data events we'll be scrutinizing include UK CPI inflation, US and UK retail sales, US, UK, and Eurozone PMI data, Eurozone and Japanese Q4 GDP figures, minutes from the last Fed monetary policy meeting, US housing data, the US Empire State manufacturing index, and the weekly US jobless claims report.