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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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La Française Allocation is a French UCITS in regards to the 2009/65/CE Directive. The Fund received AMF authorization on July 15th 2003 and was launched on July 31st 2003. The strategy changed as of July 19th 2012. Management company : La Française Asset Management – Paris – approved by the “Autorité des Marchés Financiers” under N GP97076 on July 1st, 1997.

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