Markets had a positive start to the year as slowing inflation in the US and Europe raised expectations that central banks’ cycle of interest rate hikes can end sooner than anticipated. The prospect of less restrictive monetary policy improved sentiment which boosted equities. With the demand for bonds increasing against a weakening economy, US government bond yields declined, particularly longer dated bonds, meaning that prices increased. In January. Falling energy prices impacted energy stocks while growth stocks such as many of those in the US technology sector outperformed more defensive sectors including healthcare, utilities and consumer staples, which feature more heavily in value indices, a reverse of the trend from last year and an indication of the change in risk sentiment so far this year.

The US labour market remained strong with the unemployment rate falling to a record low in December, however, wage pressures have eased slightly. The increase in shelter inflation was offset by falling energy and vehicle prices, lower health insurance rates and airline fares. The number of home building permits has seen a decline in the US, existing house sales and average sale prices have also fallen as activity weakens. Despite the poor consumer sentiment during a period of sharply rising prices, US consumers continued to spend by reducing their savings and increasing debt. The US Fed slowed the pace of interest rate increases from 0.5% to 0.25% with rates currently at 4.75%. The easing labour and property market pressures should help to moderate inflation.

The ongoing energy crisis in Europe has eased somewhat and the Eurozone economy remained resilient with inflation continuing to fall since August last year. The relatively mild winter and the energy support measures provided by government has reduced the risk of a deep recession. The resilience of the economy was reflected in the return achieved by the European equity market in January and improving consumer sentiment contributed positively to the performance of government bonds.

Inflation in the UK dropped slightly due to lower energy and core goods prices while service inflation increased as wage growth remained robust. UK businesses and households continued to come under pressure given higher interest rates, particularly as a greater percentage of the population are on short term fixed rate mortgages in the UK relative to the US and Europe. The Bank of England raised interest rates to 4% and now expect inflation rates to slow to 4% this year and 2% in 2024 whilst also turning slightly more positive on economic growth. This led to the belief that the Bank of England may have reached the end of their tightening cycle, hence the fall in the value of sterling and gilt yields. Although confidence is relatively low, the UK equity markets rose in January.

Japan has had one of the loosest monetary policies among developed nations. With inflation accelerating to its highest level in over thirty years, the Bank of Japan loosened its yield curve control by allowing 10-year government bond yields to rise as high as 0.5%, which is in effect a slight tightening of the money supply. While the Japanese equity market performed in line with global peers, Japanese government bonds underperformed.

China’s zero-COVID policy and mass infections impacted GDP growth, where retail sales declined and industrial production decreased due to labour shortages. The surprisingly rapid end to the zero-COVID policy raised expectations that the Chinese economy will experience a strong recovery this year. Government’s infrastructure investment and monetary policy easing should provide further support to enable sustained growth. Service sectors should be the first to benefit from the economic reopening as pent up demand is released and consumers start spending their excess savings, while the sale of consumer goods should increase as a result of improved confidence and continued policy support. With a significantly improving macro backdrop, Chinese equities were the best performing equity market in January.

The sharp fall in bonds and most equity markets last year suggests that markets may have already priced in a lot of bad news including a recession which may now be less severe or even or avoided, a reasonably attractive long term entry point for most assets may therefore now exist. With data suggesting that economic activity is cooling to an extent that reduces inflationary pressures but not to a point that indicates a prolonged downturn, equities and bonds have the potential to deliver positive returns which has been highlighted by the strength of returns in January. The end of China’s zero-COVID policy and a surprisingly resilient European economy should support corporate earnings, however, the economic backdrop remains challenging and the key risks to the outlook include more stubborn inflation and tighter monetary policies from central banks.


Market Performance 2023 Year to Date
FTSE All-Share +4.50%
FTSE World ex-UK +4.74%
FTSE Actuaries UK Conventional Gilts All Stocks +2.56%
FTSE Actuaries UK Index-Linked All Stocks +3.16%


Total returns in GBP to 31/01/2023



Key Rates  
Bank of England Base Rate 4.00%
Inflation (Retail Price Index/Consumer Price Index)* 13.40%/10.50%

  *December 2022

Source of data: FE Analytics,,

The content contained in this article represents the opinions of MacIntosh & James Partners Ltd. The commentary in no way constitutes a solicitation of investment advice and should not be relied upon in making investment decisions. Past performance is not a reliable indicator of future results. The value of your investments can fall as well as rise and are not guaranteed.