Please see below today’s Daily Investment Bulletin from Brooks Macdonald, with a look ahead at Inflation data coming out of the US today. Received this morning – 12/01/2023:
What has happened
As markets eagerly await the US CPI release later today, there was growing optimism that inflation would quickly fade in 2023, buoying equity and bond markets. US 10-year Treasury yields fell with the benchmark yields sitting at 3.53% at the time of writing. Short-dated Treasury yields remained more robust with the Fed still expected to continue with tight monetary policy in the short term, even if we see a downside surprise to inflation today.
EU green subsidies
Risk appetite was also helped yesterday by reports suggesting that the German Chancellor was supportive of a fresh joint EU financing scheme which would provide a counter-balance to the US’s green subsidies which have been instigated by the recent blockbuster Biden bills. The optimism also extended to a broader hope that the EU was more likely to provide bloc wide measures looking forward, in good times and bad. The difference between Italian and German 10-year yields was a direct beneficiary of this with the spread narrowing by almost 0.3% since the start of the year, as investors imply that Germany would ultimately be warmer towards fiscal burden sharing.
US Inflation
With the European inflation numbers pointing to a possible global retrenchment in inflation pressures, hopes have been riding high that we will see a third downside miss to the US CPI release today. Lower inflation now will open up far more options for global central banks to respond to the downturn in economic growth expected in 2023 therefore inflation remains critical to the outcome for US and European GDP this year. As a reminder, the economist consensus expects US headline CPI to fall to 6.5% and for the core figure, which excludes food and energy, to fall to 5.7%. While the initial reaction will be to these primary figures, bond markets will also be studying the sub-components to see if there are signs of slowing inflationary pressures amongst some of the stickier items in the CPI basket.
What does Brooks Macdonald think
As ever, it is hard to overstate the importance of today’s CPI figures. The current rally we have seen in risk assets, while moderate against the context of 2022’s falls, is predicated on an easing inflation backdrop. With inflation appearing to fall, markets are more confident that monetary policy can ease when economic growth recedes, avoiding a harsh recession. A large upside beat to the numbers today would call this into question making 13:30 today a vitally important time for markets.
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Cyran Dorman
12/01/2023