Today’s announcement of the latest US inflation statistics had been eagerly awaited by investors around the globe looking for insight into the Fed’s next moves.
With the news that October’s US inflation has come in lower than expected, investment managers and strategists have been sharing their reaction with Wealth DFM as follows:
David Goebel, Associate Director of Investment Strategy at wealth management firm Evelyn Partners, comments:
“Inflation continues to fall towards the Federal Reserve’s 2% target. Progress towards this objective seems to be slowing, however, with the important core number not having reduced significantly since last month, although it did come in below the consensus. We think it is unlikely to change the FOMC’s hawkish bias, and the prospect of rate cuts, currently priced into markets to start in summer next year, remains a long way off.
“October’s jobs report revealed a smaller than expected increase in non-farm payrolls, a downward revision to the previous months figure and the unemployment rate ticking up to 3.9% in October, its highest since January 2022. It is too soon to extrapolate this softer data release into the beginning of a trend in the labour market, but it could be starting to move in a direction which is more consistent with the Fed’s inflation target. Along with higher yields at the longer end of the Treasury curve, the labour market weakness will be a key counterpoint in the Fed’s consideration of the inflation outlook.
“Declining global oil prices meant gasoline prices fell 5% over the month and were the biggest drag on headline CPI inflation. Used car prices, which had been a key driver as recently as May this year, continued their deflationary contribution, as -0.8% on the month. Overall shelter cost inflation came back down to 0.3% on the month from the higher print last month of 0.6% which had concerned markets.
“Only eight among 65 forecasters in Bloomberg’s survey anticipated core monthly CPI as low as 0.2%. The Fed will be pleased but aware that one lower inflation print does not mean they should pivot to a more dovish stance. We think the ‘higher-for-longer’ bias will be maintained for the time being.
“That said, markets are not now anticipating any further interest rate increases from the central bank and the committee are likely to continue their ‘wait and see’ attitude about any further increases. Both the Fed and investors will be paying close attention to potential continued softening in the labour market.”
Lindsay James, investment strategist at Quilter Investors comments:
“Today’s inflation data in the US has offered a further signal that the Federal Reserve’s work on interest rates is probably done, even though official indications keep another rate rise this year on the table. Although core inflation is currently declining only slowly, there are increasing signs this will speed up in early 2024 amidst a softening economic backdrop, and so whilst central bankers seem keen to end all talk of future rate cuts, they are likely to be disappointed on this front. Managing the message around the path of interest rates may become trickier should the data appear to be more positive than expected.
“The release highlighted the impact of falling energy prices, something that will be mirrored across other advanced economies, with the energy component down 4.5% year-on-year in October and down 2.5% month on month. However shelter inflation, which constitutes one of the largest components of US CPI, remained stubbornly high, rising 0.3% month on month. As a result, the path back down to target is going to be a long and arduous one, and may just give the Fed enough cover to ignore the calls for rate cuts for now, no matter how noisy they get.”
According to Priscilla Cheung, Investment Specialist at Brooks Macdonald, the velocity of change could still be deemed unsatisfactory as she comments:
“A positive couple of weeks for US equities is likely to extend as today’s US consumer inflation data came in at 3.2% just below economists’ expectation of 3.3%. Stock futures rose sharply while two-year Treasury yield retreated. Despite Federal Reserve Chair Jerome Powell’s hawkish comments last week, markets now anticipate that the Fed will keep interest rates unchanged in the 5.25%-5.5% range this year.
“While today’s print confirms the view that inflation is trending towards the target rate of 2%, the velocity of change could still be deemed unsatisfactory. Adding to the still cloudy picture, the US economy defied expectations by growing at its fastest pace in nearly two years in the third quarter, however it’s noteworthy that US consumer confidence has begun to waver over the past three months to October. In a rich week for data, investors will now be looking for some clarity in other key US data releases, including labour market participation, housing starts, and most notably retail sales, which is expected to contract for the first time since March 2023.”
Janet Mui, head of market analysis at wealth manager RBC Brewin Dolphin, said:
“The US consumer price index was below the expected figure, with both headline and core inflation slowing. Markets were particularly focused on core inflation because the resilience in the US economy is expected to keep underlying price pressures elevated. But there is good news, as core inflation rose by only 0.2% MoM compared to the expected 0.3%, meaning the annualised pace is closer to the Federal Reserve’s 2% inflation target. It is often said that the last mile to inflation coming down to 2% will be difficult, but today’s data offers hope things are heading in the right direction. It provides further confidence that the Fed is done with hiking interest rates, as it is working as intended. Markets are cheering this inflation report with equity futures rising and bonds rallying.”
Daniele Antonucci, Chief Investment Officer at Quintet (parent of Brown Shipley), said:
“Today’s inflation numbers support the notion that the Fed is done with its rate hiking cycle. Both headline and core inflation were lower than expected, albeit not yet consistent with the central bank’s price stability target. We expect the Fed to hold interest rates in the 5.25-5.50% range, before cutting them slowly over the course of 2024.
“The Fed was careful in keeping interest rates on hold at its November meeting and the latest economic data fell significantly short of expectations. This is a more general trend: we think that the Eurozone and the UK have reached the peak in interest rates, too. Activity is likely to contract in the services and manufacturing sectors across both economies and inflation should continue to decelerate, albeit gradually.
“In all, we think Western central banks won’t raise rates again this year. We are sticking with our current portfolio positioning, holding more government bonds and less riskier bonds relative to our long-term allocation. Within equities, we hold mostly large, high-quality companies across the US and Europe, which are less volatile than the broader market. Hence, when volatility increases, these tend to perform better than the overall market.”
