Market Update

Unfortunately, the outcome of the Bank of England's monetary policy meeting this week didn't align with our expectations. While we didn't anticipate immediate policy changes, we had hoped for a split decision on negative interest rates. However, it was a unanimous 9-0 vote to maintain interest rates.
Interestingly, the Bank of England tactfully acknowledged that negative interest rates are a viable option without confirming their immediate implementation. This strategic move allows them the flexibility to consider negative rates if economic conditions worsen without alarming the markets and prematurely signaling tighter monetary policy.
Regarding the economic outlook, the Bank of England adjusted its 2021 GDP forecast from 7.25% to 5% due to the expected 4.2% contraction in Q1 2021 owing to the current lockdown restrictions. However, they anticipate a swift recovery post-lockdown, likely aided by the rapid coronavirus vaccine rollout in the UK, with the economy returning to pre-coronavirus levels in early 2022.
Interestingly, the market was surprised by the Bank of England's inflation forecast. They expect inflation to sharply approach their 2% target. However, this shouldn't be a cause for concern. Inflation is always calculated in comparison to prices from 12 months ago. The recent surge in oil prices, driven by OPEC supply cuts and a more optimistic economic outlook, means that over the next 12 months, the oil price will likely be significantly higher than it was during the same period last year.
We believe the Bank of England and other major central banks will disregard this inflation as it's a result of distorted oil prices rather than excess demand. Last year's oil price collapse, unfortunately, couldn't be fully capitalized upon due to lockdown restrictions.
In other developments, the Italian equity market emerged as the clear winner this week, surging 7% on speculation that Mario Draghi, the former President of the European Central Bank, might become the next Italian Prime Minister.
In the US, despite the unemployment rate dropping to 6.3%, its lowest since last March, employment figures were lower than expected, with non-farm payrolls growing by just 49,000. Strangely, this disappointment is actually good news, highlighting the urgent need for additional fiscal stimulus.
Looking forward to the upcoming week, we are set to analyze UK industrial and manufacturing production, UK Q4 GDP, US and Chinese CPI inflation data, US weekly jobless claims, and the University of Michigan Consumer Sentiment Index.