Investment Viewpoint: how did markets react to US inflation data?

Simplify the complex with clear and concise market insights direct from our investment experts every week.

Equity markets with Bernard Swords, Chief Investment Officer

What were the key takeaways from the US inflation data release last week – and how did it impact equity markets? 

• The US Consumer Price Inflation (CPI) data came in higher than expected for a third consecutive month. The monthly gain in core inflation was relatively high at 0.4%, but year-on-year it held steady at 3.9%. 
• The Producer Price Index (PPI) was a little bit better behaved. The month-on-month rate was down 0.1% but year-on-year it accelerated to 2.4%. Could these figures change the Federal Reserve’s thinking? Perhaps, but it is the PCE inflation data, where there is less impact from accommodation costs, that it watches, and it has been running cooler than the CPI data. 
• Equity markets did succumb to the interest rate pressure by the end of the week, dropping almost 1% over the week although euro weakness turned this into a gain of 0.4%.
• The ‘new economy’ sectors started to take the lead again in anticipation of the results season, but cyclicals also performed well as developed economy economic data suggests a good growth background. Defensives were the laggards. 
• We would be a bit cautious as it could be a case of the journey being better than arrival in the results season. Along with that, equity markets have completely ignored the developments in the interest rate markets, assuming superior growth is going to pull us through. 
• There is also the continual rise in the oil price which could get to a level that could cause equity markets to shiver.
• China’s woes continue. The inflation data was weak with deflation still in the air. Core CPI was down 0.6% month-on-month and just about in positive territory year-on-year (+0.6%) Trade data was also weak. Imports were down 1.9% year-on-year indicating a consumer that is still reticent to spend

Fixed Income with Elizabeth Geoghegan, Head of Fixed Income Strategy

How did fixed income markets perform last week – and what does it mean for our strategy? 

• It was a tough week for fixed income, but more so in the US, as the repricing of rate cut expectations has gathered pace again this month. 
• Since the start of April, the data in the US, such as the better inflation prints and strong jobs data, has meant that the rate repricing has gathered pace once more. Markets now only expect two cuts by the end of the year from the Fed and the timing of these cuts continues to be pushed out. The 10-year yield is now at levels not seen since November last year. 
• In Europe, the economic backdrop is still very different to the US. And so, even though yields have risen since the start of the month, the 10-year German yield is well within year-to-date highs. 
• The ECB met last week – and the commentary continued to signpost June for a cut. Previously, many economists would have argued that the ECB would have to wait until after the Fed moves to cut rates, but there is a growing appreciation now that the US and European economies are on very different trajectories, and so greater policy divergence stands to reason at this point.
• Looking at our strategy, we will be watching European data closely going forward to ensure that the data continues to support the current trajectory of the ECB. Better data would impact our current constructive duration call. In contrast to this, if yields were to move higher whilst data continued to show weakness, this would be viewed as a move away from fundamentals and hence a potential opportunity.
• For now, however we continue to hold our current positioning which is buffered by well contained yield moves in Europe.

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The week ahead: what to watch out for

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