July 14 2023
Not a week appears to go by where we aren’t discussing inflation. Despite our best efforts to find something else to discuss, we again start with that topic, given the impact that it has had on markets this week. On Wednesday we saw the release of inflation data for the US to June. This delivered a positive surprise, with inflation coming out at 3%, lowering than the consensus expectation of 3.1%. This was also below the previous reading of 4%.
The reading of 3% represented the lowest year on year figure seen since March 2021. Falling energy costs, some being due to base effects, are proving disinflationary. The level of food inflation also fell. Catching the eyes of market commentators, however, was the continued fall in consumer services excluding shelter element. This has been Jerome Powell’s preferred measure of what has become termed ‘sticky inflation’ and nicknamed as the ‘Powell Indicator’. A fall here therefore was most welcomed by the market, equities and especially fixed income.
At the same time, we saw the release of the US producer price index to the end of June. This measures the change in the prices paid to US producers of goods and services. Year on year, this fell to 0.1% which was below the consensus forecast of 0.4%. What influence does this have? Some market commentators believe that the path of producer prices is a leading indicator to the future direction of consumer prices. If that indeed is the case, then the latter could be heading back towards the target range sooner than what is currently expected.
The release of this data has meant that we have seen a fall in future interest rate expectations. A further hike of 0.25% remains expected, which will take the Fed Funds Rate to the 5.25%-5.5% range. Prior to this data, another rate hike had been priced in, but that now looks less certain. Futures also imply that rates will fall a lot quicker during 2024 than had been expected. Now, we have seen these expectations gyrate significantly elsewhere, so this is by no means a nailed-on certainty, but still, it represents the other side to the coin compared to last week, where it was all about rates having to go higher still.
This was perceived as positive news for both the equity and bond market, not just in the US but also in the UK. From the 7th to close on the 13th July, the FTSE 250 was up over 4%, the FTSE 100 up 2.6% and the S&P 500 up 2.54% in local currency terms, total return basis. Gilts, meanwhile, as measured by the ICE BofA UK Gilts All Stocks index, were up almost 1.5%, with their US counterparts up over 1.75%.
UK markets, in particular the banking sector, were also helped by the release of the Bank of England UK Banking Sector Stress Test. Even though some of the assumptions made for this were worse than those seen through the global financial crisis, the survey concluded that banks would come through it well, all things considered. So, we end the week on a positive note, long may it continue.
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