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Please see investment bulletin below from Brooks Macdonald received this afternoon – 13/05/2022.

What has happened

Intraday volatility continues to be a major theme, with a late US rally dragging the US index from almost 2% down last night to close broadly flat. Today’s initial market moves point to a more buoyant session however with the recent intraday swings and the index losses already seen this week, this needs to be kept in context.

Bond market moves

The sell-off at the start of 2022 was driven by inflation fears being priced into higher interest rate expectations which made high growth equities, in particular, less attractive. This current sell-off is dominated by economic growth fears as demonstrated by the US bond market which is starting to price in fewer rate hikes over the next year as investors conclude that the Fed is likely to blink in the face of lower growth. Yesterday Fed Chair Powell confirmed the market view that 50bp hikes were likely to be appropriate at the next two Fed meetings. When discussing the economic growth outlook, Powell appeared less bullish than in previous speeches saying that the interest rate path was likely to ‘include some pain’. Additionally, he said that whether a soft landing could be achieved was largely up to matters outside the Fed’s direct control such as broader supply chain issues and global growth momentum. This largely echoes the market’s conclusion that central banks are boxed in by economic data at this time.

China’s lockdown

The lockdown in Shanghai has shone a spotlight on China’s zero-COVID policy with the onshore and Hong Kong equity indices selling off aggressively after the region had outperformed earlier in the year. Today has started to see a strong rebound, driven in part by the better risk-on tone of the last 24 hours but also a recognition that the Chinese government’s move from a hard zero-COVID policy to a softer zero community-transmission policy is likely to limit the duration of the lockdown. On this basis, Shanghai officials have put forward a plan to start reopening the city on 20th May, buoying sentiment.

What does Brooks Macdonald think

Although the CPI figures (justifiably) have controlled the headlines this week, the PPI data which looks at producer rather than consumer prices reading was released yesterday. Headline PPI fell from 11.5% year-on-year in March to 11% in April, echoing the CPI theme of slower year-on-year growth but still very elevated levels of inflation. Producer prices are an important lead indicator for consumer pressures down the line so a rolling over of these annual figures will support the narrative that year-on-year inflation is showing signs of slowing. 

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Charlotte Clarke