US CPI came out at +2.1 % vs +1.9% expected for January 2018
22 February 2018
Market direction was pretty clear, at least regarding equity indices with a week of strong rebound: +4% for S&P 500, +3% for Euro Area equities and +5% for emerging market equities.
Fixed income markets behavior was harder to read: US bond yields soared after US inflation data came out way above expectations on last Wednesday. They moved from 2.82% to 2.94% on the day, and the move was mostly due to inflation component which seems quite sensible. Markets have come back since, US 10Y bond yield is trading now at 2.86%, ie very close to levels before inflation report.
Last, the dollar continues to weaken, which seems logical given that fiscal deficit announcements at a abyssal level is under preparation by Trump’s administration. We could almost reach fiscal deficits of 2008, but without an economic crisis…
Events to note from last week:
- Inflation print of course (“the most important inflation figure ever” if we believe some investment banks…) which comes out at +0.3% on core inflation (+0.349% precisely) vs +0.2% expected on January 2018. Core inflation was +1.8% vs +1.7% expected and +2.1% vs +1.9% on headline inflation. It is a very good figure, which tends to confirm the very good wage growth we had two weeks ago. However, like in wage growth, we will have to wait for a confirmation given that some components look “weird” (+1.7% on the month on apparel for instance). We must not forget either that the method was changed, which blurs data analysis. But even without “weird” components, it remains a strong figure;
- US retail sales: very disappointing with December data revised downwards. Negative impact on Q1 GDP expected. Here again, not easy to read data given that bad weather can be an explanation;
- US real estate data: whopping data, way above expectations;
- Euro area GDP was in line with consensus at 0.6% for Q4 (2.7% annualized). Very robust figure;
- We must mention as well French unemployment rate that slumps from 9.5 to 8.9% this month!
- Japanese data was weak: disappointing GDP and core machine orders below expectations.
Markets are not easy to read currently, the day inflation dropped being a “special” one for instance (equities sold off massively and then soared…). But we keep a positive equity view over the medium term: growth is good, earnings are on a positive trend and valuations are not too expensive. Inflation is rising, yes, but breakeven inflation is already on high levels and real yields rose quite a lot too. We think US bond yields have limited room to rise over the short term.
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