Inflation Surprise Spooks Markets

Global equity markets struggled last week as elevated US inflation data reignited concerns relating to the future path of interest rates. The Federal Reserve’s (Fed) preferred measure of inflation, the Personal Consumption Expenditures (PCE) index rose to 4.7% [1] against the forecast of another fall, the first time it has accelerated since September. Futures markets responded by increasing their expectations of a 50 basis point (bp) interest hike at the Fed’s next meeting whilst expectations of cuts later in the year reduced. The S&P500 and the NASDAQ fell by -2.7% and -3.3% respectively whilst the Dow Jones slipped into negative territory for the year so far [2]. Treasury yields also rose across the curve with the closely monitored 10-year security ending the week 14bps higher at 3.97%.

In Europe, headline inflation eased to 8.6% last month, a 60bp reduction on the prior month although core inflation, the measure which excludes food and energy from the calculation rose by 10bps to 5.3%. European equities also retreated, the MSCI Europe ex UK index declining by -1.7% whilst in the UK, the FTSE100 and FTSE250 declined by -1.6% and -2.0%. Moving to Asia, the Nikkei 225 fell by -0.2% with some support coming from dovish comments made by incoming Bank of Japan Governor Kazuo Ueda2. Meanwhile in China, the Shanghai Composite bucked the negative trend seen elsewhere to post a weekly rise of +1.3%, bouncing back after three straight weeks of losses.

Moving to commodity markets, oil prices inched higher on growing expectations that Russia may expand its existing production cuts. Brent crude added +0.2% to $83.21 a barrel with gains capped by news that US inventory continued to rise last week. In other news, copper prices declined by -2.9% to $8,689 a tonne on concerns relating to expected Chinese demand whilst gold concluded the week at $1,810 an ounce, a fall of -1.5%. [3]

Week Ahead

The Institute for Supply Management (ISM) publishes its PMI equivalent in the US this week with the manufacturing sector expected to have contracted again this month. Additional US data to monitor includes durable goods orders and pending home sales. In the UK, the Bank of England releases its monthly consumer borrowing report which will include a variety of key figures including mortgage approvals and credit card lending. Regarding the Eurozone, the key figure to keep an eye this week is the initial reading of February’s inflation data which comes fast on the heels of January’s confirmed 8.6% last week. Other European numbers to watch include unemployment and French GDP. Chinese focus will be firmly on Wednesday’s PMI figures with growth expected to have accelerated in both the manufacturing and services sectors during February. It’s a busy week for Japanese data releases with CPI inflation, unemployment, industrial production and retail sales all released. [4]

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[1] Bureau of Economic Analysis, 27/02/23

[2] T. Rowe Price, 27/02/23

[3] Refinitiv, 27/02/23

[4] Forex Factory, 27/02/23

SJP Approved 27/02/23