Today’s announcement from the US has revealed that CPI to June was just 3%, an inflation rate which was better than had been expected. But what does it mean for the wealth management sector? Investment experts have been sharing their reaction to the US inflation data with Wealth DFM as follows:
Daniel Casali, Chief Investment Strategist at Evelyn Partners, said: “The Fed should take some comfort in the fact that monetary tightening appears to be working to bring down inflation ahead of the FOMC meeting on the 26 July. Annual headline CPI inflation is heading back towards pre-pandemic rates and core (ex-food/energy) price rises are now below 5%. There are three reasons to expect underlying inflation to slow further from here.
“First, supply chain disruption from the pandemic has lessened significantly. One way to observe this is through used car prices, which are now falling on an annual basis as production normalises. This puts downward pressure on a past key driver of core CPI inflation during the early stages of Covid from 2020.
“Second, rental inflation continues to slow. Using data from timely online residential platforms, recent research from Goldman Sachs shows that average annualised rental inflation has eased to just +1% over the last 8 months to June from 20% plus in mid-2021. It will take time for lower rental prices to feed through to inflation, but there is evidence it is starting to happen. For instance, June shelter CPI inflation slowed to 7.8% from a peak of 8.2% in March. CPI inflation (ex-shelter) in June was up just 0.8% from a year ago.
“Third, lead indicators point to lower core inflation in the months ahead. Selling prices from the National Federation of Independent Business, or better known as the small business survey, have fallen to a level last seen when core CPI inflation was roughly 4%. The annual change in job openings is another lead indicator with a decent track record of leading inflation and this too points to lower pace of price gains ahead.
“Regardless of whether the FOMC (the US Central Bank’s interest-rate setting body) raises interest rates later this week or not (markets’ expectation is current for a 25bps increase), the Fed is likely coming to the end of its interest rate hiking cycle. This reduces the risk that the FOMC overtightens on interest rates and creates downward pressure to the economy and financial markets. Moreover, as a countercyclical currency, we expect the dollar to depreciate against other major currencies, since the risk of a so-called economic hard landing is reduced. Dollar depreciation should provide additional liquidity, which will help equities to continue their bull run.”
Nick Chatters, Investment Manager at Aegon Asset Management, commented:
“We have been waiting for some time for inflation in the US to surprise to the downside, and today it finally did. There have been a multitude of different indicators all pointing to slowing inflation in the US; however, until now, it has remained stubbornly sticky. With the inflation data today coming in below forecast and the employment data last Friday surprising to the downside, why would the Fed hike later this month?
“Powell said at the June meeting that the committee sees further hikes this year, which means this month is likely, but will today’s data change their view? I suspect not, but it should. Employment is not as strong as it was and inflation is cooling, rates are over 5%, and painful lags of past hikes are likely still to come. Keeping going because you told the market in the past that you would is not a good rationale for raising rates.”
CJ Cowan, portfolio manager at Quilter Investors said:
“The US has seen a substantial fall in its inflation rate and today marks the first sub-4% reading of headline CPI since March 2021, edging it ever closer back to target. More significantly, core inflation came in at 4.8% y/y and below expectations, triggering a Treasury market rally and some yield curve steepening.
“While the Federal Reserve paused in June, it still indicated that it sees two further hikes later in the year. The market priced an 80% chance of the first of those being delivered in July prior to the inflation data and the initial reaction to today’s data still suggests that remains the most likely outcome of the Fed’s meeting in a couple of weeks’ time.
“As favourable base effects start to roll off later in the summer, there is some concern that inflation will bottom out above the Fed’s 2% target. However, survey data of long-term inflation expectations remain fairly well behaved, albeit a little higher than pre-pandemic averages, and inflation markets still price a swift return to target.
“While this may prove to be a little optimistic, on balance we think we are far from seeing the full effects of the rate hikes that have already been delivered. Remember the Fed only started hiking in March 2022 (16 months ago), so it will take some time for policy to fully transmit to the economy. Meanwhile, if the Fed are genuinely committed to tackling inflation then those expecting interest rate cuts in short order may be disappointed as learnings from the 1970s suggest that easing policy prematurely can result in inflation re-emerging.”
Edward Park, Chief Investment Officer at Brooks Macdonald, said:
“A highly constructive week for US equities looks set to continue as today’s US consumer inflation data shows that price pressures are easing over vast swathes of the US economy. Headline and core inflation both missed expectations, declining to 3% and 4.8% respectively. The improvement in supply chains alleviated pressure on goods, while core services have remained relatively stable. The 0.2% month-on-month increase in Core US CPI is the smallest monthly increase in almost two years which will be warmly welcomed by the US Federal Reserve and markets.
“While today’s report is undoubtedly a positive sign, the Fed still has a long way to go in achieving its objective of 2% inflation. Jerome Powell essentially telegraphed the bank’s intention to raise rates further during his last press conference, and the markets are still taking him at his word, pricing in a 0.25% increase when the upcoming meeting concludes on the July 26. With the labour market adding over 200,000 jobs and an increase in hourly wages last month, this scenario appears even more probable.
“All attention now turns to Friday, as some of America’s largest financial institutions are poised to kick off the second-quarter earnings season. Investors and the Federal Reserve will be closely monitoring JPMorgan Chase, often regarded as a barometer of the US economy, who are expected to announce a substantial rise in earnings for the quarter ending in June. With US consumer confidence at its highest level in 18 months and data indicating that the economy grew more than initially projected in the first quarter, many market participants are beginning to question whether the long-anticipated recession will ever materialise.
“Across the Atlantic, today’s numbers demonstrate that the UK is becoming an ever-greater inflation outlier among G7 countries. With the UK expected to maintain higher interest rates over the coming quarters compared to the US, the GBP/USD exchanged rate approached 1.3 in the aftermath of the US CPI report.”
Janet Mui, head of market analysis at wealth manager RBC Brewin Dolphin, said: “US inflation slowed more than expected on both headline and core measures. Markets are cheering this positive development.
Today’s data is significant because there is solid confirmation that US inflation is heading in the right direction and can determine the Fed’s policy direction for the remainder of the year. With a headline inflation print of 3% now compared to a high of 9.1% last year, it can provide some comfort to the Federal Reserve that its tightening campaign is working. Crucially, the core services ex-housing measure of inflation which the Fed cares a lot about, has slowed to just below 4%.
The last leg of getting back to 2% can remain difficult and core inflation at 4.8% is still very elevated. That is why expectations of another 25-basis point rate increase this month is still high, but it may well be the last rate increase in this cycle.”