February 24 2023
Whilst the result was already known, the market keenly awaited the publishing of the minutes of the last US Federal Reserve meeting. These revealed that the majority of the policy setting committee members had voted in favour of a 0.25% hike. There were a few dissenters, however, who had voted in favour of a 0.5% increase. Where there was agreement, however, was that all participants continued to anticipate that ongoing increases would be appropriate until the economic data gave enough confidence that inflation was on a sustained downward path to the 2% target. They also acknowledged that this was likely to take some time. This suggests that monetary policy is likely to remain restrictive, with the central bank recognising that there is typically a lag between interest rate movements and the impact on the economy
It won’t have gone unnoticed, however, that later in the week we had the release of the January PCE Price Index, which is the Federal Reserves preferred inflation gauge. This posted a rise of 5.4% year on year, rising from an upwardly revised 5.3% recorded in December. Not only was this figure higher than the previous month, but it was also considerably above the forecast figure of 4.8%. Prices of goods rose 4.7%, but it was services where the larger appreciation was seen, at 5.7% against the previous month figure of 5.4%.
Core PCE meanwhile, which excludes the more volatile food and energy items, rose by 4.7% year on year, higher than the 4.6% figure for December and 4.3% forecast. Inflation in the US therefore appears to be being a little more stubborn than some had previously thought.
US 10 year Treasury yields were a little higher on the week, at 3.95% on the 24th against 3.82% on the 17th. The move upwards in 2 year Treasury yields was a little more pronounced, rising from 4.62% to 4.81% covering the same two dates.
This is not the only jurisdiction where we have seen this however, with it being evident in Canada, Australia and the Eurozone. In the latter we have also seen comments from rate setting committee members that they might not be done with hiking just yet, suggesting that some see risk that the markets are underestimating inflation.
Market expectations have seen a complete turnaround from where they were at the start of February. Here it was expected that interest rates would get nowhere near what the Federal Reserve expected and from this lower peak rate cuts would be seen. Now, they believe that they will peak at a higher level than the last Dot-Plot median produced by the central bank and even after a forecast rate cut by year end would still keep us above the central bank median expectation. How quickly times can change, perhaps showing how data dependent markets remain given it has been quite a while since we have seen this sort of inflationary environment.
Finally, just finishing on China, where the reopening appears to be well underway. Whilst it may take a while to see it come through in economic data, as most tends to be lagging, it is clear to see that people are on the move again. Subway usage across the four major cities of Beijing, Shanghai, Guangzhou and Chongqing has risen sharply so far in 2023. With social mobility back, this should prove a positive for consumer spending on goods and particularly services.
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