Investors remain constructive and sentiment remains generally positive, in spite of the noise that occurs daily in the global geopolitical marketplace, mostly coming from the Trump Administration. January CPI and PPI both came in hotter than expected last week rattling markets but only for what felt like a nanosecond. Inflation is the issue that undid Mr Biden, and it is a real issue that needs to be “front & centre” for President Trump to retain the support of his base. The graph below shows the recent trajectory of headline and core inflation in the US, which is gently trending in the wrong direction.
Chairman Powell clearly has the Fed focused on inflation, acknowledging as much during his congressional grilling on Tuesday and Wednesday. Mr Powell said that the US economy continues to fire on all cylinders, and this – as odd as it might sound – is the difficulty in getting inflation back to the 2%/annum target. It is also the very reason that the Fed should be steadfast in its commitment to stay the course. My concerns are more at the intermediate and long-end of the US Treasury curve, which seems to be signalling a tug-of-war between higher-inflation-for-longer and risks to economic growth on the horizon. The constant discussion and threats of tariffs is an overhang, although Mr Trump has shown he will back off if markets react too adversely. Also, there is the ongoing concern about US deficits, with the Republicans in Congress now squabbling – as could have been anticipated – over Mr Trump’s pro-growth “America first” agenda leading to higher deficits, and a more pragmatic plan to address spiralling deficits. Reining in deficits through fiscal responsibility would likely act as brakes leading to slower economic growth. To be fair there are some concerning signs that surface occasionally, including US retail sales for January – released Friday – that came in the weakest in two years. However, economists were quick to point out that a number of anomalies occurred in January that were unlikely to be repeated in the months ahead. Even so, the figures helped soothe inflationary fears momentarily, leading to a slight improvement in bond prices (i.e. slightly lower yields) as the week drew to a close.
Perhaps the key to this dilemma is the work being undertaken by DOGE under the leadership of Elon Musk. Governments are inherently less efficient that the private sector, and are best constrained, controlled and managed. The government is needed for essential public services that can, in most cases, only be provided by the state (e.g. national defence, critical infrastructure, education, social security, etc). Personally, I have always leaned more towards the libertarian end of the spectrum (i.e. small government). Rooting out inefficiencies and identifying fraud is a noble cause, and more governments – especially in countries dominated by the public sector – need to undertake an audit that addresses the waste of taxpayers’ money. What is very sad though is to see this sort of process being undertaken with ongoing mistruths and partisan-driven finger pointing. It taints the process badly and is un-necessary, leading to mistrust in the overall effort. Mr Musk needs to dial his relentless inuendo back, focusing instead on addressing government inefficiencies without political taint. Otherwise, this will get old fast before it is “mission accomplished.”
The noise resonating from the US is drowning out nearly everything else it seems, although I did pick up this week that 4Q24 UK GDP came in slightly better than expected. You have to put this in perspective – following no growth in 3Q24, 4Q24 GDP in the UK came in at 0.1%, hardly worth getting excited about but perhaps providing some relief to the under-pressure Labour government.
MARKETS THIS WEEK
Stocks were positive across the board last week, with Europe continuing its stellar performance YtD (+8.0%). US equities were better, too, with the more interest-sensitive Russell 2000 of small cap stocks most feeling the brunt of higher financing rates for longer. Tech stocks rediscovered their mojo, delivering the best performance amongst US equity indices for the week. US Treasury yields were flattish to slightly down, although Treasuries were volatile and bounced around all week. Gold was better, touching record highs, and the US Dollar was weaker.
WHAT’S AHEAD
US markets are closed on Monday for President’s Day.
Economic focus: With an economy under some duress, the UK has some important data releases next week, including CPI, PPI and retail sales for January, as well as consumer confidence and preliminary PMI data for February. Japan will also release January CPI, perhaps an interesting harbinger for the next move by the BoJ. In the US, focus will largely be on preliminary (February) PMI data and consumer confidence on Friday. There are also a number of Fed officials speaking, and some home sales data will be released. Minutes from the last FOMC meeting will be released on Wednesday, although I expect there to be little we do not already know. We will also get preliminary PMI data for Germany for February on Friday, a proxy for the broader Eurozone.
Earnings: Around 385 of the S&P 500 companies have reported earnings to date, which have generally been good. I would suggest you take a look at “Earnings Insights” by #FactSet to read up more about this earnings cycle. 46 more S&P 500 companies will report earnings this coming week, one of the most important of which is WMT (Thursday pre-open), a signal of US consumer sentiment and trends. A very good source for tracking earnings is earningswhispers.com.
Upcoming central bank meetings:
ECB: Mar 5-6 (expect 25bps reduction in policy rates)
Bank of Japan: Mar 18-19
FOMC: Mar 18-19, including revised Summary of Economic Projections (the CME FedWatch Tool now predicting only one 25bp reduction in Fund Funds in 2025, in June)
Bank of England: Mar 20
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