Week ending 12th August 2022.

Wednesday’s (10 August 2022) US CPI inflation reading was the front and centre of our focus this week after last week’s extremely strong US employment data (please see here) prompted financial markets to start speculating (and pricing-in) that Fed policymakers would increase US interest rates by a further 0.75% before their next scheduled meeting on 21 September 2022.

And as we have previously explained, our main concern is that central banks increase interest rates too fast and too far that it results in a sharp economic slowdown.

Thankfully, Wednesday’s inflation reading not only eased our anxiety, but it flipped the market speculation 180 degrees: financial markets are no longer expecting an intra-meeting interest rate increase; and not only do they now think a 0.5% increase in interest rates is more likely, but they see interest rates potentially being cut late next year.

In addition to seeing the headline CPI inflation fall to 8.5% in July from 9.1% June (helped by a significant drop in petrol prices), the core reading (which excludes volatile items such as food and energy) was unchanged at 5.9% versus economists’ expectations of an increase to well over 6.0% – which clearly shows that this cooling in inflation is not simply due to the fall in petrol prices.

Moreover, providing us with further reassurance that US CPI inflation has peaked was yesterday’s US PPI inflation (which is a measure of inflation from the perspective of producers), as the core reading fell to 7.6% in July from June’s 8.4% reading.

Elsewhere, the UK Q2 GDP reading showed that the economy shrank by 0.1%. Whilst disappointing, this was actually better than the 0.2% contraction that economists had predicted.

This contraction, coupled with the fact that the cost-of-living crisis is about to worsen as the energy price cap is set to increase again in October and news that the government was planning for the potential of organised blackouts in January, means that the BOE may have little choice (depending on the fiscal support given by our next Prime Minister) but to start easing up on its planned aggressive interest rate increases.

Looking ahead to this coming week, Wednesday’s (17 August 2022) release of the minutes from the last Fed monetary policy meeting will no doubt be the topic du jour. Elsewhere, we have UK employment data; UK & Japanese CPI inflation; US, UK & Chinese retail sales; Eurozone & Japanese Q2 GDP; US housing data; Chinese & Japanese industrial production; and the US Empire State Manufacturing Survey.

Investment Management Team