Global equities proved more resilient last week, with the S&P 500 experiencing a week of strong gains. Other global equity markets also did well, as the negative effects of stronger-than-expected inflation data were confined to the bond markets.
US consumer prices rose more quickly in January than analysts had expected. The markets remain overly sensitive to the building inflation pressure theme in the US, and how this affects the bond markets. On balance, most inflation categories saw a move higher than anticipated, with dollar weakness affecting all areas of the economy.
The Eurozone expanded by 2.5 per cent in 2017, its strongest performance since 2007. Much of this expansion has been driven by four economies: Spain, Germany, Italy, and France. Some Meanwhile, a considerable portion of the Eurozone’s strength can also be attributed to the European Central Bank’s stimulus policy, which has kept a lid on the cost of borrowing.
The UK inflation rate remained flat at 3 per cent in January, beating analysts’ expectations of a drop to 2.9 per cent. There are signs that the dynamics in the labour market are finally driving some level of domestically generated inflation, which could seamlessly take over from the sterling-related price rises we have seen since the Brexit vote. It could mean slightly higher interest rates than we’ve been used to. However, Brexit could yet derail any hikes in the short term, while longer term pressures of debt, demographics and technology will likely keep inflation contained.
Donald Trump outlined his infrastructure spending plans. US markets were buoyed by Trump’s plans to upgrade US roads, airports, and other infrastructure, with a pledge of $200 billion (£144 billion) from the government. While the overall amount of new federal spending of $200 billion may not seem that much when set against the headline figure of $1.5 trillion, the forecast of a 10-year deficit of over $7 trillion when compared to a previous estimate of $3.2 trillion implies a barrow load of extra bond issuance which could well drive prices much lower.
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