Please see the Weekly Market Commentary from Brooks Macdonald received yesterday:
US inflation met market expectations, allowing US equities to rise during the week
Equity markets have continued their strong start to 2023, with the US Consumer Price Index (CPI) number coming in line with market expectations. This week sees the US earnings season start to ramp up despite a US holiday on Monday and Wednesday’s highlight will be the Bank of Japan meeting which may contain some policy tweaks.
The market now expects the US Federal Reserve (Fed) to raise interest rates by only 25bps on 1st February
With the CPI release matching market expectations, the bond market was quick to price in a smaller Fed rate hike when the committee meets in a few weeks’ time. The market now expects 27.2bps of rate hikes in February as of Friday’s close, suggesting investors are only assigning a very low probability to a larger 50bp rate hike. This week we have a number of Fed speakers who will update their monetary policy views in light of the latest CPI and wage numbers. Next weekend sees the beginning of the communication blackout ahead of the next Fed meeting so the rhetoric used this week will be of crucial importance to bond markets. Whilst there is no direct inflation data this week, Wednesday’s Retail sales number will be a good barometer for consumer demand. Retail sales are expected to have declined last month as weaker car sales combine with lower gasoline prices.
The Bank of Japan meets with Japanese inflation rising and Japan yet to raise interest rates this cycle
Japan remains a stark outlier amongst other global central banks, having not risen interest rates during this cycle. Even if we do not see a change to monetary policy this week, the bank’s inflation forecasts are likely to have risen, driving a debate around a future tightening of policy. Indeed, a day after the Bank of Japan meets, the countries’ inflation data will be releases with headline inflation expected to have risen by 4% year-on-year. With the annual wage negotiation cycle in Japan coming up, the level of national inflation will undoubtedly influence wage demands, a risk the Bank of Japan will be well aware of.
Last week’s US CPI release saw US equities post a strong week, outperforming European equities. One of the major drivers looking forward will be the Q4 earnings season where analysts are expecting a year-on-year decline in corporate earnings of almost 4%. This week sees large US banks report as well as some of the cyclical bellwethers in the US such as Alcoa, Kinder Morgan and Schlumberger. While the market has welcomed weaker economic data, such as the ISM services survey earlier this month, it will still be hoping for robust corporate numbers.
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Andrew Lloyd DipPFS
17/01/2023