US and global markets continue to be driven by inflationary concerns.
US inflation as measured by the CPI – Consumer Price Index has inflation running at circa 6% – well down from the 9% plus of last summer, but well above the Federal Reserve’s (Central Bank’s) target of 2%. Over the past several months, the ‘Fed’ has embarked on several interest rate rises including a number of 0.75% rises versus a normal monetary policy move of 0.25%.
Indeed, the last US rate rise conducted by the FOMC – Federal Open Markets Committee saw a ‘more normal’ 0.25% rate rise as the Central Bank perceived that inflation had peaked and would fall steadily from here. In January and early February, investors also believed that inflation was ‘old news’ and bought stocks heavily. The US stock market rose about 20% from their September/October lows and 10-year US Treasury bond yields fell below 3.5%.
Since then the news has not been so good for both the Federal Reserve and investors.US employment, as measured by the monthly Non-Farm payroll data, has been significantly stronger than expected and inflation did not fall by as much as was expected in January.
Amongst this slew of economic data that has surprised to the upside, we had strong Retail Sales data in the US, and according to the Purchasing Manager Index in Europe, the eurozone’s bloc ‘s economy is growing again.
The debate whether the US (and the rest of the world) will achieve a ‘soft landing’ i.e. controlling inflation via higher interest rates but not drive the economy into recession or a ‘hard landing’ – such sharply high US rates indeed driving the economy into a recession is a debate that runs and runs after every current economic data release.
It is possible, a period of very slow economic activity in the US occurs i.e. a recession is avoided but if growth picks up, and inflation remains stubbornly high, US interest rates will have to rise further and the stock and bond markets will suffer.
The current Fed Funds rate is a range of 4.50% – 4.75%. The ‘Fed’ is seen as likely to raise this key rate above 5.5% by September.
FX: The US Dollar moves of course higher with the prospect of higher US interest rates and lower as those expectations ease. The DXY Index, a measure of the dollar’s strength against the currencies of several trading partners is at 103 something close to mid-range – well below the 113-level reached in October 2022 as US interest rates started to rise sharply, and quicker than the rest of the world. And well above the 89-level reached as US rates plunged during Covid-19.
Gold remains subdued at $1830 per ounce and well below its $2,050 p.o. historic highs. Gold suffers if interest-bearing products e.g. bonds start offering higher rates-of-return.
Oil is also subdued at $85 dollars per barrel, and well down from 2022 highs of circa $130 p.b. With the world facing a possible recession demand for oil has fallen significantly.
US and Global inflation remain key!