Week ending 16th September 2022.

Hawkish central bank policymakers were no doubt getting super excited this week after US CPI inflation readings came in higher than expected – and as such, global equity markets finished another volatile week lower.

US inflation in August came in at 8.3% versus economists’ expectations of 8.1%, which unfortunately all but ensures a 0.75% interest rate increase when Fed policy meet on Wednesday (21 September 2022), with some economists now expecting a full 1% increase!

However, we believe these equity market falls were an overreaction: although the inflation reading was slightly higher-than-expected, it was still lower than the previous month’s reading of 8.5% (and well down from June’s 9.1% reading).

Additionally, the supply-chain disruption and higher energy costs which have been the largest contributors to this spike in inflation, have now largely worked their way through the year-on-year inflation calculations – and as such we believe that this will help ensure inflation readings will continue to fall in the months ahead.

Furthermore, today’s (Friday 16 September 2022) long-term inflation expectations data from the University of Michigan showed that the 5 to 10 year expected inflation continued to fall after coming in at 2.8% for September – and this is especially positive as it suggests that the current high inflation is unlikely to become entrenched.

As an aside, FedEx, the US based delivery company, announced this week it would be withdrawing its earnings forecast – a clear signal that the US (and global) economy is slowing and thus the economy doesn’t need aggressively higher interest rates.

As we have previously explained, we believe the Fed’s planned aggressive interest rate increases will more likely than not push the US economy into recession – meaning that policymakers will soon be forced to pivot and start cutting interest rates, which is positive for equity prices.

It was a slightly better story in the UK as inflation was expected to fall to 10.0% from 10.1%, but actually came in at 9.9%.

However, it is currently anyone’s guess what BoE policymakers will do when they meet on Thursday (22 September 2022).  Policymakers have been hinting that they want to jump on the bandwagon for larger interest rate increases, but Liz Truss’ energy price cap should help to restrain UK inflation and thus reduce the need for policymakers to act aggressively.

And as with the US, we don’t believe the UK economy can afford higher interest rates – and this was laid bare this week in the UK’s retail sales data reading as August sales dropped 1.6% on the month versus expectations of a fall of just 0.5%.

In addition to the Fed and BoE policy meetings on Wednesday and Thursday respectively, this coming week we have we have US, UK, Eurozone & Japanese PMI; Japanese CPI inflation; and Eurozone consumer sentiment.

Investment Management Team