Please see the below article from Brooks Macdonald providing their latest Investment Bulletin received this afternoon 31/03/2023.
What has happened
Equities rose yet again yesterday with European equities seeing some outperformance as the market caught up with US gains late on Wednesday. European bonds came under pressure after the German inflation release showed an acceleration in price pressures with the year-on-year CPI print coming in at 7.8% versus 7.5% expected. This led German bund yields to rise across the yield curve with other European bonds following the move in the benchmark Eurozone sovereign.
Federal Reserve Speakers
Yesterday saw another set of speeches from Fed members as the conference roster continues now the Fed meeting is out of the way. President Collins sounded hawkish despite the recent banking issues, saying that ‘inflation remains too high, and recent indicators reinforce my view that there is more work to do.’ President Kashkari meanwhile focused on some of the concerns around banking sector liquidity but added that ‘the services part of the economy has not yet slowed down and … wage growth is still growing faster than what is consistent with our 2% inflation target.’ Lastly President Barkin reminded markets that the Fed was considering a 50bp interest rate hike last week until just before the SVB failure, and that ‘if inflation persists, we can react by raising rates further.’ As bond and equity markets calm in the aftermath of March’s banking troubles, Fed speakers appear more comfortable actively weighing up financial stability and inflation risks in full view of the market.
Inflation data
Today attention will move to the US PCE inflation data which is expected to show core PCE expanding by 0.4% month-on-month compared to 0.57% in January. Economists are also forecasting a fall in personal income and personal consumption after a very robust level of growth in January. With the PCE data coming out after the release of the CPI and PPI prints the market has a reasonable steer on the overall level of inflationary pressure and therefore the consumer demand numbers could be equally important.
What does Brooks Macdonald think
The PCE print will look at February’s data and therefore the Fed and market participants will find it difficult to extrapolate any data into the rest of 2023 given the turmoil of March. The PCE data will however give some indication of whether the economic strength and stickier inflation shown in other February data sets is also shown in the Fed’s preferred inflation measure.
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Alex Clare
31/03/2023