February 2023 Investment & Economic Update

Our latest monthly investment update for February 2023 looks at how the global investment markets, economy, and commodities are performing.

The FTSE 100 index of leading UK company shares closed at the end of January at 7,771.70 points, up 319.96 points or 4.29% during the month.

Awaiting rate decisions

Markets in the UK and Europe started February positively as investors await the latest interest rate decisions from the US Federal Reserve, Bank of England and European Central Bank.

While markets anticipate the US Fed will hike interest rates by 25 basis points later today, the Bank of England and European Central Bank are expected to announce a 50 basis point increase tomorrow.

Investors are looking for forward guidance from the central banks, as inflation indicators suggest rising prices have peaked and are now in decline, making further aggressive monetary tightening less necessary.

If the Bank of England increases interest rates to 4% this week in response to wage growth and core inflation figures, it would be their tenth consecutive rate rise since the process of the monetary policy started in December 2021.

Better economic news

The EY ITEM Club, a forecasting group, expects better economic news from the Bank of England at their next Monetary Policy Committee meeting, saying in a report: “A significant fall in gas prices, lower market interest rate expectations and an economy less weak than expected should cause the Bank of England to dial back on the downbeat economic outlook of its last forecast when it presents new projections on Thursday.

“Stubborn core inflation and strong pay growth mean another 50 basis points rise in bank rate is likely. But the EY ITEM Club thinks this increase could prove the end of the current rate-rising cycle.”

Falling house prices

With mortgage borrowing costs rising, average house prices fell for a fifth consecutive month. According to lender Nationwide, the average sale price fell to £258,297 in January, with annual house price growth slowing to just 1.1%, down from 2.8% a month earlier.

Average property prices fell 0.6% in January after recording a 0.3% fall in December.

Robert Gardner, Nationwide’s chief economist, said: “There are some encouraging signs that mortgage rates are normalising, but it is too early to tell whether activity in the housing market has started to recover.

“The fall in house purchase approvals in December reported by the Bank of England largely reflects the sharp decline in mortgage applications following the mini-budget.

“It will be hard for the market to regain much momentum in the near term as economic headwinds are set to remain strong, with real earnings likely to fall further and the labour market widely projected to weaken as the economy shrinks.”

Walk Out Wednesday

The growing industrial action is connected to the rising cost of living, with the first day of the month dubbed ‘Walk Out Wednesday’.

As many as half a million people withdrew their labour as part of the largest strike in a decade, with members of several trade unions taking part across schools, universities, trains and buses. Thousands of schools closed for the day as a result.

Rising petrol prices

Despite signs of peak inflation and the top of the interest rate cycle approaching, drivers experienced rising fuel costs following an increase in oil costs.

Data company Experian released data showing the average price of a litre of petrol on UK forecourts was 148.8p on Monday, up from 148.4p a week earlier. Petrol prices remained significantly lower than their record high of 191.5p a litre in July last year.

Luke Bosdet, AA fuel price spokesman, said: “After a fall of close to 43p a litre since the summer record, drivers feared that a rebound in petrol prices would eventually happen.

“So far, pump price averages have risen only slightly. But today’s price is only 0.9p below the average price at the start of the Ukraine war on February 24 when pump prices surged.”

Electricity price methodology

Another factor continuing to drive price inflation is the method for setting electricity prices, which new analysis has found increased UK household bills by up to £7.2 billion over two years.

The Carbon Tracker Initiative reported that energy suppliers are forced to pay the highest wholesale price for electricity, regardless of how it is generated. Gas-fired power stations are the most expensive way to generate electricity but only account for around 40% of electricity consumed by UK households.

In response, the Department for Business, Energy and Industrial Strategy said it had “already launched a major review” of the electricity market “to radically cut costs” for consumers in the long term.

Contraction forecast

The UK is expected to be the only developed economy to contract in 2023, according to new forecasts from the International Monetary Fund (IMF).

The forecast shows the UK economy contracting by 0.6% this year, revising an earlier growth forecast. However, the IMF also said that the UK is now “on the right track”.

The IMF also said the trend of central banks putting up interest rates to try to curb inflation and the war in Ukraine continued to “weigh on economic activity” worldwide.

Market data

On 1st February, £1 buys $1.2320 or €1.1317. Gold is $1,905.20 an ounce, and UK natural gas futures are 145.90p/therm, down from 179.99p/therm a month earlier. The UK 10-year gilt yield is 3.304%, down from 3.535% a month earlier.

Kellands will continue to keep you updated on market developments on a regular basis. However, if you have any questions or need some financial advice in the meantime, please do not hesitate to get in touch.

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