Please find below, the Daily Investment Bulletin update received from Brooks Macdonald this afternoon – 10/02/2022
What has happened
Risk appetite surged yesterday with a broad rally across most major sectors as central bank speak pushed back against the market’s aggressive interest rate pricing. Technology has been a particular beneficiary of this rally and yesterday’s session is another sign that the fate of the sector is showing signs of decoupling away from the grind higher in US bond yields.
Central bank speak
After the comments from Bank of France President Villeroy on Monday, suggesting that monetary tightening expectations in the market may have gone too far, bond markets began to stabilise after a choppy few days. Yesterday we heard from Fed voting member Mester of the Cleveland Fed, Mester said that she didn’t see a compelling reason to raise rates by 50bps when lift off occurs (widely expected to be in the March meeting). In the UK, the Bank of England’s Chief Economist, who pushed back against market pricing at the end of last year, said that ‘I worry that taking unusually large policy steps may validate a market narrative that bank policy is either foot-to-the-floor on the accelerator or foot-to-the-floor with the brake.’ European bond markets reacted positively, with German bunds finally ending their run of 11 consecutive days of yield rises.
US CPI
Today sees the week’s main event, the latest US inflation numbers. Most central banks have stressed the humility required around forward guidance given the uncertainties around inflation and growth for the rest of this year. Today’s CPI number will be closely watched to see if the month-on-month path of inflation is starting to slow. Consensus is expecting US CPI to increase by 0.5% over the last month (reaching 7.3% year-on-year) and for US Core CPI to also rise by 0.5% over the month and 5.9% over the last year. Both Core and headline CPI grew by 0.6% in December so if the consensus is achieved, this would show a slowing of the inflation rate. There is room for caution however, 0.5% month-on-month inflation is still a hefty increase and there may be signs of distortion due to the Omicron variant.
What does Brooks Macdonald think?
Few are expecting a ‘turn’ in inflation data until April/May of this year when the month-on-month figures are expected to start moderating. Should we see inflation come in to the downside today, the current rally may gather further steam. That said, we should be very conscious of impacts from the Omicron variant distorting the information we can garner from one data release in isolation.
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David Purcell
10/02/2022