This week’s UK data will have been welcomed by variable‑rate mortgage holders, as it has significantly raised the probability of a March interest‑rate cut and improved the outlook for as many as three cuts in 2026.
On Tuesday UK wage data showed that the average earnings for December rose 4.2%, much less than the expected 4.6%, with unemployment nudging higher to 5.2%. Softer wage growth, alongside rising unemployment increases the likelihood that the Bank of England will ease interest rates at their next meeting in March, in an effort to help support consumers and businesses.
On Wednesday UK inflation data came in at 3%, down previously from 3.4%. Looking ahead, inflation is expected to continue easing over the coming months, further reinforcing the case for interest rate cuts. It is worth noting that the UK economy is highly sensitive to interest rates, with the mortgage market heavily exposed to two- and five-year rates, in contrast to the US which typically have 10- and 30-year mortgage products. Any reduction in interest rates tends to feed through quickly to mortgages, helping to ease pressure on consumers. With elevated savings rates in the UK, lower interest rates will also discourage savings and encourage consumer spending.
Staying with the UK, data released on Friday morning was positive. UK retail sales were much stronger than expected, rising 1.8% (month-on-month), against expectations of 0.2%. Manufacturing and Services PMI data was both expansionary and ahead of consensus. The Chancellor will have been delighted to see public sector net borrowing for January painting a positive picture. There was a surplus of over £30bn, over £6bn ahead of expectations. UK tax receipts typically peak in January due to the Self-Assessment tax deadline (31st January), but even with this it’s pleasing to see a bigger tax take for the month than expected. We have seen government bond yields fall this week (prices rise) and UK equities have responded positively to the supportive data.
European PMI data, released alongside UK data, was broadly positive, with manufacturing PMI returning to expansionary territory (defined as a reading above 50). Given Germany’s fiscal spending plans there is the prospect of a meaningful boost to European manufacturing over the course of 2026. This underpins part of our investment thesis for exposing portfolios to small-cap European equities which should benefit from this domestic investment cycle.
Over in the US, markets have stabilised following the recent bout of weakness due to fear around AI-related disruption within the software sector. Expectation for interest rate cuts later in 2026 continue to build and we saw the yield on the 10-year US government bond fall to 4%. Todays advanced GDP data proved disappointing, with growth of 1.4% (quarter-on-quarter) compared with expectations of 2.8%. US Core PCE inflation data (which is the US Fed’s preferred measure) came in higher than anticipated at 3% for December. Higher inflation and lower growth versus expectations is not ideal and will give the Federal Reserve plenty to consider. It’s worth noting that the US government shutdown, the longest on record, is likely to have weighed on GDP and as such investors may look beyond this one data point in isolation.
While gold and silver prices remain considerably off their end of January highs, prices appear to be consolidating at higher lows, which potentially provides a technical for future price appreciation. Staying with commodities, oil prices have moved higher amid escalating tensions between Iran and the US. Brent crude has climbed back above $70 a barrel, having started the year at $60.
The Chinese equity market is currently closed due to the Lunar New Year, with it reopening on Tuesday 24th February. 2026 is the year of the Fire Horse; the horse represents freedom, strength and independence, while fire represents intensity, transformation and boldness. With the Chinese property sector still heavily weighing on the economy, we do need to see bold decisions from Chinese authorities in order to help transform the long-term outlook for China.
While the global backdrop still feels fragile, the combination of softening inflation, falling interest rates and positive economic growth is creating a more supportive environment for risk assets. Portfolios are benefitting from increased exposure to emerging markets and real assets, coupled with our willingness to take a contrarian stance on the US equity market.
Andy Triggs, Head of Investments
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