Week ending 31st March 2023.

Thankfully calm returned to global equity markets this week after the recent banking-sector uncertainty continued to recede – and as you can see from the accompanying table, equity markets ended the week nicely higher.

Falling inflation readings also contributed to this positivity.

In the US, the Fed’s preferred inflation measure, the Personal Consumption Expenditures (PCE) price index, slowed quicker than expected in February to 5.0% from 5.3% in January (which was itself, revised down from 5.4%) – which means it has now fallen relatively consistently since peaking last June at 7.0%.

The core PCE inflation reading also came in slightly lower than expected at 4.6% thanks to a 0.3% month-on-month increase in February versus an expected 0.4% increase. January’s reading also saw a downward revision (0.5% from 0.6%).

Together with the University of Michigan’s one-year inflation expectations which slowed to its lowest level since April 2021, this confirms to us that not only is the Fed tightening cycle is nearly over, but it is still likely that we will see interest rates being cut in the US before the year is out – and this prospect will further strengthen global equity markets.

It was a similar story with Eurozone CPI inflation as March data readings came in lower than economists had forecast. The headline reading slowed from 8.5% in February to 6.9% in March – economists had expected a reading of 7.1%.  Although the core CPI reading nudged up from 5.6% to 5.7%, an increase was expected.  Taken together, we suspect this will allow ECB policymakers to slow the pace at which they have been increasing interest rates, potentially to just 0.25% when they next meet on 4 May 2023.

Looking ahead to this coming week we have US ISM; US factory orders; US employment data (non-farm payrolls unemployment rate, participation rate and average earnings); Eurozone PPI; and Chinese PMI.

Investment Management Team