Please see below this week’s market commentary from Brooks Macdonald received yesterday afternoon – 07/02/2022
Weekly Market Commentary | Thursday’s US data release the key event of the week
07 February 2022
By Edward Park
• Bond market moves and earnings releases spurred further volatility last week
• This week’s US Consumer Price Index release will be closely watched for signs of sticky inflation within rental prices
• With the European Central Bank’s hawkish tone last week, bond markets interpret the latest governor comments
Bond market moves and earnings releases spurred further volatility last week
Bond markets suffered further swings last week as investors had to price in a more hawkish European Central Bank and Bank of England on top of the large moves already seen in US rate markets. Idiosyncratic risk was also at the fore, with earnings creating volatility not only in the individual stocks but also in largely unconnected companies in the same sector.
This week’s US Consumer Price Index release will be closely watched for signs of sticky inflation within rental prices
Consumer Price Index (CPI) data is always important, however with the Federal Reserve (Fed) clearly data dependent, US CPI on Thursday is likely to be the main event of the week. This release could be particularly interesting as Core CPI is expected to slow moderately on a month-on-month basis, however the year-on-year number looks set to increase further, with analyst expectations at 5.9% on the core number and 7.3% on the headline1. In 2021, we saw a large number of upside beats to CPI and at times of transition, estimates are particularly prone to error. In terms of the factors driving the latest release, investors will be trying to sort through pandemic related distortions, supply chain issues and more durable inflation areas such as rents and owner equivalent rents. Rent/owner equivalent rents are closely watched by the Fed as a gauge of the stickiness of inflation across the economy so expect some focus on this.
With the European Central Bank’s hawkish tone last week, bond markets interpret the latest governor comments
Whilst major central bank meetings are now out of the way for the next few weeks, we will have a steady stream of speakers giving their personal views on the future path of policy. Over the weekend, ECB governor Knott suggested that the ECB could hike rates in Q4 of this year, followed by another hike in H1 2023 given his expectation that Euro Area inflation will remain stubbornly high throughout 2022. After last week’s ECB press conference and the more hawkish tilt, markets are already pricing in 50bps of hikes before the end of this year2, so markets are more aggressive than the ECB at the moment.
Bond markets still feel bruised from the rapid change in Fed policy seen over the last quarter and are keen to not be similarly wrong-footed by the ECB. Arguably, the backdrop in the Euro Area is very different to that in the US and Ukraine risks are a far greater factor in the current, elevated, headline CPI numbers. There has been a more constructive tone around Ukraine tensions in recent days. Whether this catalyses an agreement or not will be important for inflation and ECB policy.
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Charlotte Clarke
08/02/2022