Written by Ilaria Massei.
Last Friday, we saw a positive UK GDP reading with the UK economy growing by 0.1% as services activity strengthened. Moreover, the Office for National Statistics data published last Friday showed that a recent fall in gas prices helped household finances and boosted savings. This data is certainly encouraging as it could suggest that the UK has avoided a recession (defined as two consecutive quarters of negative GDP growth). However, this might also suggest that the Bank of England will be forced to raise interest rates again, given that the positive GDP could lead to inflationary pressure. On a separate note, Rishi Sunak and his government rejected the request coming from businesses to reopen immigration. This is to especially help the hospitality sector, which is suffering from labour shortages, and is arguably holding back the UK economy from growing. The Prime Minister will re-address this and his plan will be one of the main points of the Budget in March.
In Japan, the Yen and the long-term Japanese government bond yields surged, raising uncertainties over the Bank of Japan’s policy board meeting this week. The Bank of Japan reviewed its long end yield curve policy measures by widening its 10y JGB yield target to +/- 0.5% (previously +/- 0.25%) in December. This measure was supposed to restore order in the Japanese bond market, distorted by the central bank’s ultra-loosing policy. However, the measure increased volatility, suggesting that the Bank of Japan might need to provide forward guidance to the market.
Elsewhere, Emerging Market stocks have seen a great rebound with the MSCI Emerging Market Index up +2.9% last week in local currency terms. This is the result of two forces both influencing the balance of trade in Emerging Markets, in a positive way. On one hand, we have seen signals of easing inflationary pressures globally that might suggest that the Federal Reserve will slow its interest rate rises. Conversely, China since lifting its Zero-COVID policy restrictions, is suggesting a recovery in the economy this year. An increase in activity in China will likely lead to a rally in Emerging Markets as Emerging Market countries are beneficiaries of higher demand for commodities and other services that serve the Chinese population.