February 16, 2018

Stock markets steam higher as US inflation picking up

Management comment

Investors were delighted to be able to enjoy an intimate dinner date with their darling inflation on Saint-Valentine’s day.

US inflation figures published on 14th February, the traditional day for lovers, added even more weight to future inflationary outlook. The consumer price index (CPI), which is the key statistic that mere mortals observe, came in at 2.1% vs 2.5% a year earlier. It was the personal consumer expenditure index (PCE) however which requires deeper analysis as this data has served as the basis used by the Fed for setting its target at 2% since 2012. The PCE came in at 1.8% vs 2.1% 12 months earlier. Although this figure may therefore represent a return to normal, rather than a sudden resurgence or an uncontrolled spike in inflation, it must be considered in the highly particular interest-rate context. 10-year yields now appear to be edging towards 3%. The newfound inflationary trend has spurred equity markets to new highs on both sides of the Atlantic in the wake of strong annual earnings and optimistic guidance for 2018. Currency markets were much more agitated on the other hand.

The dollar seems to have breached the 1.25 threshold against the euro and taken a stronger foothold in the 1.25-1.30 fluctuation range. The yen rallied vs the euro after having broken through spectacular levels (137). Doubts subsist over the US economy as consumers and real-estate investors will come under greater pressure as interest rates steepen and the dollar weakens. The programmes instigated by Trump will take time to feed into the economy and also threaten hefty budgetary imbalances.

Meanwhile, the eurozone is proving to be the “almost” model student, with its budgetary deficits contracting sharply, while posting a trade surplus and implementing predictable accommodating monetary policy, accompanied by a decline in unemployment across the board, even in France! Furthermore, investors and managers do not appear to be alarmed by the strong euro, for the time being at least. Although the equity market rally may last a while longer, the same challenges are looming over the next few months associated with absorbing an excessively rapid rise in interest rates.

Let us nonetheless use this opportunity to once again wish a happy new year for the start of the Chinese year of the dog and note that 1994, which was a challenging year for the bond markets, was also a year of the dog.

Igor de Maack, Fund manager and spokesperson at DNCA. This article was finalised in February 16th, 2018.

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Investors were delighted to be able to enjoy an intimate dinner date with their darling inflation on Saint-Valentine’s day. US inflation figures published on 14th February, the traditional day for lovers, added even more weight to future inflationary outlook. The consumer price index (CPI), which is the key statistic that mere mortals observe,...
2018-02-16