Please see the article below from Brooks Macdonald providing a Weekly Market Commentary. Received this morning 21/02/2023
A near-term increase in US inflationary pressures cause the bond market to upgrade its interest rate forecasts
Last week was characterised by a broad market reappraisal of the likely path of interest rates given stickier inflation and more robust economic growth. The bond market increased its expectations of US terminal interest rates by 10bps, with the US terminal interest rate for this cycle now expected to hit 5.28%. Despite this move, equities managed to insulate themselves from this move, with the US index posting a small loss while the European index outperformed, rising by over 1%.
Global flash PMI surveys on Tuesday will help investors gauge whether the recent US economic strength is broad
Tomorrow sees the release of the global flash PMIs which will provide an assessment of economic growth momentum on a country-by-country basis. Alongside these reports, European consumer confidence surveys will be released as well as important German industry surveys. Markets have been caught off guard by the strength of the US economy so far this year, with Fed Governor Bowman saying that she was surprised that the interest rate hikes so far had done relatively little to cool demand. The economic data this week will help markets assess whether economic demand remains robust outside the United States and whether the recent increase in the market’s ECB interest rate hike expectations is warranted.
The PCE inflation reading on Friday is likely to echo the US CPI report in showing stickier inflation at the start of 2023
With the US CPI release now out of the way, the market will turn to the PCE deflator, the inflation measure preferred by the Federal Reserve. The personal income and consumption report will provide a good gauge of the health of the US consumer on Friday with income and consumption both expected to rise versus last month’s reading. The Core PCE reading will be closely watched to see if it echoes the stickier inflation backdrop suggested by the CPI release. If prices are increasing due to stronger-than-expected US consumer consumption, this will give a clear mandate to the Fed to remain tough on inflation and double down on its hawkish narrative.
After a quiet start to the week as the US closes for Presidents’ Day, the equity market will need to decide whether to retreat or rise after a directionless fortnight for markets. The disconnect between bond pessimism and equity optimism will need to close over the coming months. One of the factors helping support equity markets is that investors, based on recent industry surveys, are still overweight bonds and underweight equities, this may allow equities to continue to perform despite the tougher inflationary backdrop.
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Alex Clare
21/02/2023