We were provided more insight into the UK economy this week with a raft of data releases. The latest purchasing manager indices for December suggest a two speed economy, with the service sector in expansion whilst the manufacturing sector index suggests a contraction there. Overall, such is the weight of the service sector the economy appears to be in an expansionary phase.

Labour market data meanwhile was mixed. Whilst the unemployment rate held steady at 4.3%, in line with forecast, there were 35,000 less people on the payroll register. Average earnings meanwhile were stronger than expected. Including bonuses the rate came in at 5.2% to October, much stronger than the 4.6% consensus forecast. Excluding bonuses we saw a rate of 5.2%, above the 5% expectation. The strength within these figures may lead to the market tempering their expectations for interest rate cuts in 2025.

Consumer price inflation on the other hand was better behaved. Whilst there was a pick up to 2.6% this was in line with consensus. The rate has now picked up from 1.7% in September. Inflation within the service sector held steady at 5%. Although higher than would be preferred, the central bank was likely to be pleased not to see it higher in what is proving to be a ‘sticky’ element.

Last, but my no means least, the Bank of England met on Thursday to set monetary policy. The interest rate was left on hold at 4.75%, which was very much in line with market expectations. This was perhaps justified given that inflation data is not completely playing ball quite yet. The central bank reiterated their stance that a gradual approach to cutting rates for now remains appropriate and will remain the case until they see a clear path to a sustainable 2% inflation rate. There was a great level of dissent within the ranks however, with three of the nine committee members voting for a rate cut of 0.25%, believing this was justified given sluggish demand and, in their eyes, a weakening labour market.

Also remaining on hold was the Bank of Japan, who kept their short term interest rate at 0.25%. This was in line with expectations, although one member of the rate setting committee did vote for a 0.25% hike. The market impact was very much seen in the currency market, with the yen weakening against the US dollar. This was further compounded by the US Federal Reserve. Whilst, as expected, they cut the Fed Funds Rate by a further 0.25% to the 4.25%-4.50% range, it was the forward guidance which market analysts were focussed on.

This was released in the form of the latest Fed Dot Plot, which shows the predictions for interest rates from each voting member of the committee. Here there was a noticeable reduction in the number of interest rate cuts expected for 2025. The median consensus is that we will only see two cuts now, compared to the previous expectation of four. This inevitably gave rise to US dollar strength. An equity market sell off was also seen. Little bit of irony here, as the central bank provided upward revisions for economic growth for 2024 and 2025. That, you would hope, would be good for corporate earnings etcetera, but for now it appears interest rate cuts are the only thing that counts!

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