Ear to the Ground

April 14 2023

There were mixed feelings surrounding the US inflation data released this week.  Pleasing the market, we saw the annual rate of inflation fall for the ninth consecutive month to 5%, the lowest level recorded since May 2021.  This was below the consensus forecast of 5.2%.

Conversely, core inflation, which excludes volatile items such as food and energy, saw a pick up, coming in at 5.6%, driven by yet higher shelter (rents) costs.  Whilst this was in line with the market consensus it continued to highlight that inflation still remains sticky.  The latest predictions from the Federal Reserve certainly suggest this could be the case.  The median forecast suggests that Core PCE inflation, one of their preferred measurements, will still stand at 3.6% at the end of this year.  This is higher than their December projection of 3.5%.  For this reason they still forecast that the Federal funds rate will be at 5.1% at the end of this year, which suggests that another rate hike will be forthcoming at the May meeting in the order of 0.25%.

Stubborn core inflation is likely to mean that the Federal Reserve has little room to cut this year, despite the market currently taking a very different view, where a number of cuts are forecast.  If we were to see a sharp fall in economic activity, or a hard landing, as some commentators predict, this would leave central bankers in something of a predicament.  Do they jump in to save the economy by cutting interest rates at the risk of inflation spiking upwards, or does controlling the latter remain their primary focus.  Only time will tell, but for now the bond and equity markets appear to be telling us different things.

Whilst inflation remains the key forecast for economists, investors eyes could be diverted as we enter the first quarter earnings reporting season for US companies.  We have already seen analysts revise down their expectations, which could provide companies with a lower bar to beat.  On this basis, it will be interesting to see how share prices react to reported earnings which are above or indeed below these expectations.  What may be of more importance could be the forward guidance which companies provide for the ensuing quarter(s), in terms of business conditions, revenue and profitability expectations.

Despite the issues which hit the banking sector during March, JP Morgan got the reporting season off to a strong start, reporting earnings per share which was well ahead of market expectations, at $4.32 per share versus $3.41.  Revenue was also higher, at $39.34bn versus $36.19bn.  Net interest income earned meanwhile was up almost 50% from the previous year, thanks to higher interest rates.  This was at the top of analysts’ expectations.  Wells Fargo and Citigroup earnings also surprised to the upside.

Despite forecasters predicting that we could see a recession in the US, it would appear that this won’t impact our desire for a burger.  The latest research from YCharts shows that McDonald’s currently trades on a price to sales ratio in excess of nine time, close to its all-time high.  Now I love a burger as much as the next person (although admittedly not from this establishment) so let’s hope the real thing doesn’t become priced in the same way as its share price.

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