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market snapshot

21 July 2023 |
With improving CPIs, the mood music for investors might be sounding sweeter
  • Equities rally on improving inflation data
  • Investors ask: has tightening reached a crescendo?
  • Ukraine, China and US banks sound a note of caution

Better-than-expected macro data buoyed markets this week with declining consumer price indices (CPIs) in major economies suggesting central banks may (eventually) be able to put further tightening on hold.

In the UK, the figures from the Office for National Statistics (ONS) revealed CPI inflation of 7.9% in June, compared with forecasts of 8.2%.This compared favourably with May’s reading of 8.7%, offering hope that, after 13 consecutive rate rises the Bank of England may finally be winning the war against inflation1.

Eurozone inflation was likewise on a decelerating path. Eurostat reported Euro-area prices rose 5.5% year-over-year last month. May’s read was 6.1%, while in April it was 7%. This month’s data marks the lowest eurozone inflation rate since the start of 20222.

The triumvirate of positive reads was kicked off last week where US Labor Department statistics revealed a 0.2% increase in consumer prices in June – an increase of 3% from a year earlier – from May’s levels3.

Figure 1: CPI in the US, UK and eurozone

According to Lewis Grant, Senior Portfolio Manager for Global Equities at Federated Hermes4, the result is a growing sense of optimism in markets, as signs in the US and Europe (and perhaps even the UK) point towards a soft landing.

“As inflation begins to ease, the narrative shifts from a sustained period of high rates into rate cuts in the not-too-distant future,” he says. “We’re not there yet – inflation is still high and has proven sticky, so we expect to see further rate hikes this year – but investors are looking beyond the short term: this more rational outlook is indicative of an easing of risk aversion, almost a release of tension. Investors and central bankers are readying to breathe a sigh of relief.”

According to Grant, a more rational outlook among investors will bring a widening of opportunities within equity markets. “The narrow, megacap-oriented market has kept markets afloat in 2023: if this earnings season can confirm that recession is not inevitable then we expect to seek opportunities throughout the market cap spectrum, with small and mid-cap growth names becoming interesting once more,” he says.

This is not to say investors are in risk-off territory and Grant notes the global equity team will continue to pay close attention to strong balance sheets and inventory numbers in particular. “We remain cognisant that market sentiment is fragile – geopolitics can shift at any time,” he says.

In particular he highlights the conflict in Ukraine, a further slowdown in China and major US banks facing significant real estate losses as potential speed bumps. “Each of these threats, along with uncountable unknowns, has the potential to halt the sentiment rebound in its tracks,” says Grant. “An underpin of quality and portfolio diversification remain an essential part of our philosophy.”

Investors and central bankers are readying to breathe a sigh of relief

Emerging markets mirrored the upbeat mood with both the EMBI Global Diversified index and the CEMBI Broad Diversified index finishing last week in positive territory.

“We believe that this is likely a turning point in sentiment towards emerging markets with stable or lower core rates [from the US] making primary issuance a possibility and easing concerns around near-term maturities,” observes Yulia di Mambro, Director of Emerging Markets Corporate Research at Federated Hermes.

As evidence of this, di Mambro highlights how two investment grade corporates and one high yield Middle Eastern group accessed the markets this week. “The order books were materially oversubscribed, and the bonds priced 25-35bps inside initial guidance,” she says. “Inflation has already peaked in most emerging markets, and a weaker dollar will support this disinflationary path giving central banks more confidence to start easing. We therefore see material upside in local currency rates.”

For further macro insights, see the latest video with Fraser Lundy, Head of Fixed Income, Federated Hermes, where we discuss the recent divergence between the VIX and MOVE indices.

1 Bloomberg, 29 July 2023

2 Ibid.

3 Wall Street Journal: ‘Stock Market News: Nasdaq Leads Indexes Higher After June CPI Report’, July 12, 2023

4 Federated Hermes refers to Federated Hermes Limited

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