Please see below, the ‘Daily Investment Bulletin’ from Brooks Macdonald providing a brief summary of the key factors currently affecting global markets and economies. Received this morning – 11/08/2023
What has happened
US equities were unmoved yesterday after US CPI came in line with market expectations but the US 30-year Treasury auction struggled. Over in Europe, equities rose more than three-quarters of a percent as the market closed before the later US sell-off. Travel and luxury goods companies did particularly well after China announced that it would be ending its ban on outbound international group tours.
US CPI
The monthly July US CPI print came in line with market expectations but taking the readings to two decimal places there was even better news. Headline CPI expanded by just 0.17% month-on-month with core CPI expanding by just 0.16% over the same period. These very low monthly figures brought headline annual inflation to 3.2% whereas core stayed at 4.7%, reflecting the stickiness of monthly core CPI earlier in the year. The monthly numbers will receive the most attention with both the core and headline readings now near the 2% Fed target for a second month in a row. In terms of contributors to this, airfares were down 8% over the month, building on a similarly sized decline the month prior.
Bond market reaction
We have a while until the next Fed meeting therefore there were Fed speakers immediately available to comment on the CPI. President Daly welcomed the numbers but said that the monthly reading was ‘not a data point that says victory is ours’. In terms of timing of any interest rate cuts, Daly said that she expected those conversations to wait until 2024, pushing back against market hopes for a December 2023 cut. The major bond market news came with the 30-year Treasury auction however as strong demand failed to materialise, causing the bonds to be issued at 4.189%, this then catalysed further concern over the sheer size of the US deficit and its linked funding needs.
What does Brooks Macdonald think?
Stripping out some of the more volatile disinflationary contributors, such as airfares, we still see a stickier inflation backdrop in the US. That said, these volatile components can be lead indicators of wider moves within the inflation basket, just as we saw in 2021 and 2022 when inflation was on its ascendency. The overall reading will support the case for a pause in US interest rates when the Federal Reserve meet in September.
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Alex Kitteringham
11th August 2023