Not Out of the Woods Yet

Aoifinn Devitt – Chief Investment Officer

The US CPI data for January was not exactly a sweet-smelling Valentine’s Day bouquet.  Although it showed a seventh consecutive month of lower inflation than the previous month, it still came in above consensus expectations and confirmed that we are not “out of the inflation woods” yet.  Some observers were concerned at the stickiness of certain core components, mostly related to services, while the persistence of a strong US labor market continued to stoke fears of more wage inflation to come.   

Markets received the news in a subdued fashion, and the probability of further rate hikes increased, with the possibility of a higher terminal rate and ultimately a “higher for longer” approach by Central Banks around the world. Stocks initially fell in response but then stabilized, indicating that we don’t really have much in the way of new information now – six weeks in to 2023.  We are back to worrying about the cocktail of higher inflation, higher interest rates and low unemployment – and the lack of a playbook to navigate it.  It is almost like Groundhog Day, another February milestone that passed last week (although we failed to note it here).    

A warmer than usual winter continued in parts of the US (not unwelcome here in Moneta’s Chicago office), while in Europe, the same weather phenomenon has taken much of the edge off there.  As some of the strain around expected energy shortages has eased, energy prices have subsided and growth in the region has surprised on the upside.  Companies that had been braced for margin pain could breathe a little easier, and consumers, too, came back from the brink. This is partly due to the fact that Europe continues to enjoy an unemployment rate at multi-decade lows.  Despite this, however, according to economic surveys, consumer sentiment continues to be weak.  

Source: Morningstar as of 2/14/23

As earnings seasons wind down, the year-to-date numbers in markets look strong. Many commentators are scratching their heads as to why a broadly disappointing earnings season – particularly from tech stocks  – did not get punished (the Nasdaq is up over 14% year to date). This period will now attract much analysis – some around what the downward trajectory of revenues will mean for margins and earnings in the months to come, and some around deciphering why investors are holding their nerve.   

And, finally, this appeared yesterday in the European Central Bank’s Twitter account1:  

Roses are red
Violets are blue
We will stay the course
And return inflation to 2  

Who knew that Central Bankers had a sense of humor? 


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