Please see below today’s Brooks Macdonald Daily Investment Bulletin, which was received earlier this morning (14/07/2023):
What has happened
Equities and bonds continued their surge yesterday as investors contemplated the likelihood of a US ‘soft landing’ where inflation falls sufficiently to allow the US economy to avoid a recession. US equity markets have now recovered a significant portion of last year’s sell-off and are back to levels last seen in April 2022.
Market narrative shifts
It was only one week ago that the market narrative was decisively behind a sticky inflation, high interest rate backdrop however the CPI release (and yesterday’s PPI release) has catalysed a rapid shift towards hope for a sudden cooling in US inflation pressures. Those cooling inflation expectations are then feeding a growing chance of multiple interest rate cuts in 2024. The Producer Price Inflation numbers released yesterday painted a similarly rosy outlook for consumer inflation. Producer Inflation, which will ultimately filter into consumer prices, rose at just 0.1% year-on-year, below expectations and very close to outright deflation territory. The core PPI release also missed expectations and is growing by just 2.4% year-on-year. With the CPI and PPI releases impacting bond market thinking, investors are becoming more confident that the July meeting will be the final rate hike for this cycle.
Fed reaction
The ‘pivot’ towards US rate cuts occurred despite Fed speakers stressing that they could not yet gain confidence that inflation was under control from one reading. President Daly said it was ‘really too early to say that we’ve declared victory on inflation’ with Governor Waller saying that two more hikes this year remained his base case. Waller did show the Fed’s data dependency however, saying that if inflation readings continued in line with this week’s release, a pause may be warranted by September. Today is the last day before the Fed moves into communication blackout ahead of their next monetary policy meeting.
What does Brooks Macdonald think
Markets have been taking strong US economic news as bad news given economic strength is likely to booster consumer demand and therefore inflation. Should inflation show further signs of falling, despite robust economic growth, then this narrative too will change and good news for the economy will become good news for markets.
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Carl Mitchell – Dip PFS
Independent Financial Adviser
14/07/2023