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Market commentary

Economic news has been more encouraging of late, with headline inflation falling in many of the major economies and forecasts expect this to continue through the year. Warmer weather in Europe has meant energy prices have fallen since last year and the relaxation of China’s strict zero-Covid policy may help with supply of goods around the world.

9th February 2023

We still face a challenging year though, not least with geopolitical tensions ongoing. For those investors who are waiting on the sidelines, for conditions to improve before investing, all of the current events are already reflected in the price of assets. As we often state, we cannot predict the future but neither can anyone else. Since October last year, stock markets have been edging upwards looking forward to the outlook in the next couple of years once recession is over.

Future unknown events may make investments fall again, but it is that very risk which means that investing should give you a return that is higher than more secure assets, like cash deposits and in excess of inflation over the longer term.


The Bank of England’s Monetary Policy Committee kicked off the New Year with a further 0.5% increase in the Bank rate to 4.00% in line with market expectations. As it was with the December vote, it was not a unanimous decision with two members voting for an unchanged Bank rate.

As we have discussed in previous issues, the Bank is looking to the past where inflation was poorly controlled in the 1970’s. Governor Bailey emphasised they are more concerned about underestimating inflation risks, in particular the chance of inflation being higher than forecast.

On the jobs market, the Bank is concerned that the high level of employment we have could still induce higher wage growth, and that this would lead to more sustained inflation. For energy, the Bank’s inflation forecast is that energy prices flatten quite sharply as is reflected in market prices. We have all seen first-hand the volatility of energy in the last year and if energy prices remain high, it would add to future inflation. UK wholesale gas futures prices have plunged as European storage levels have stayed high with mild weather and this has led to lower demand. This should lower costs for households as well as firms.


Europe has had a better than expected performance over the winter period owing in part to mild temperatures in late 2022 which have helped to maintain high gas storage levels: German storage at the beginning of the year stands at 89%.

Energy remains a risk next winter, despite the current relief. The longer-term resolution for Europe’s energy crisis needs to be resolved as new long-term supplies to replace Russia are secured both for gas as well as non-fossil fuels.

Inflation remains the key concern as it does in the US and UK and the rhetoric from the European Central Bank is for interest rates to continue rising until they are sure it is going to move down towards their long term target inflation level of 2%.


CPI inflation fell again in December, easing to a 1-year low of 5.7% leading to expectations that interest rate rises may start to ease and the possibility of falls later in the year. Federal Reserve Chairman, Jerome Powell has been pushing back hard against arguments for rate cuts this year. A reason cited is that the Fed eased too early in past cycles, leading to still greater inflation problems later on and as we have discussed in past issues this was certainly true in the 1970s.

A key factor in the uncertainty was a strong assessment of the labour market – the labour market is expected to stay smaller than pre-pandemic levels – thought to be due to people taking early retirement. Less workers mean that the likelihood of wage price increases goes up.

On Thursday 19 January, it was announced that the $31.4trn debt ceiling had been reached. The US treasury spends (on Government departments, staffing and services) more than it brings in (from taxation) so it borrows through US treasuries to fund the difference. The US Congress sets a limit on how much can be borrowed and several times in the past, the US has reached this limit and an increase must be negotiated. After midterm elections, the Republicans now have narrow control of the House of Representatives. Accordingly, fears are that the path to a resolution could be difficult. A similar situation happened in 2011, when the US came within two days of defaulting on its debt.

Emerging markets

The sudden relaxation of China’s zero-Covid policy has presented opportunities and threats for the global economy. Continued lockdowns have caused supply chain disruptions which it is hoped will ease now. However, the sharp U-turn does come with risks and the unlocking has resulted in a mass surge in Covid-19 cases, the size of which it is difficult to gauge as official figures seem too low.

While the easing of supply chains will be good for global inflation, the additional demand stemming from the reopening of China threatens to keep energy and commodity prices higher for longer.

China-Taiwan tensions are still firmly on the radar. While relations between the US and China were improving, the alleged ‘Spy Balloon’ over the US that was shot down on Sunday and new US bases in the Philippines seems to have put efforts back in the short term.

Defensive assets

We would expect with inflation possibly reaching a peak that there is a much greater probability that fixed interest securities will resume their role as portfolio insurance in the event of lower growth or a recession.

The funds we use in your portfolio are well positioned to fulfil this role in the future. The high quality short-dated bond fund was sitting at the end of 2022 with a yield of over 4% and the index-linked gilt fund will benefit from inflation linked returns.

The index-linked fund has recovered more than 25% since October after fears of a UK Gilt crisis receded in the wake of the mini budget in September 2022.

Please speak to your Old Mill financial planner if you want to discuss your portfolio.