Brooks Macdonald’s CIO on today’s US CPI report

by | Oct 13, 2022

Written by Edward Park, Brooks Macdonald’s chief investment officer

Following today’s US CPI release, bond investors were anticipating a 75bp rate hike at the Federal Reserve’s next November meeting, today’s data is likely to further bake in those expectations.

Headline CPI rose by 8.2% compared to last year, a fall from last month’s 8.3% year-on-year reading but ahead of estimates. The headline inflation number benefits from the fall in energy prices in recent months however, the core CPI number did not. Core CPI rose to 6.6% year-on-year, an uptick from last month’s 6.3%, also ahead of estimates.

The latest US core CPI reading confirms that inflation is still being transmitted through the economy despite energy prices easing. This will cause concern to Federal Reserve members who are keenly awaiting signs of easing price pressures within the US economy now that energy prices are falling, and some supply side issues are easing.

Markets are constantly reassessing the need and ability for central banks to raise rates. The UK and the US both need to raise interest rates, but the US is in a far better position to absorb tighter monetary policy given its strong economy.

Today’s CPI report reinforces the need of the US to push ahead with interest rate hikes and US interest rate expectations have risen as a result. The US dollar strengthened against the Euro and sterling in the immediate aftermath of the CPI release.

Today’s CPI report doubles down on the message that inflation is remaining stickier than many investors had hoped. This means interest rates are likely to continue to rise and bond yields are likely to remain high on both sides of the Atlantic. Higher yields on gilts and other sovereign bonds create opportunities however, particularly for low-risk investors looking to lock-in a set level of return.

While heightened inflation, recessionary risks and currency volatility are all, rightly, causing concern for investors, an attractive yield on gilts and lower entry point for equities improves the prospects for a balanced portfolio, delivering a higher expected return for investors over the medium-term.

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