Nachhaltigkeit. Wir meinen es ernst.

Inflation: Is the party over?

market snapshot

19 January 2024 |
Inflation data did a good job of ruining the mood this week, with reads in both the US and Europe undermining hopes of a speedy about-turn in central bank monetary policy.

Fast reading

  • US and UK inflation data pour cold water on rate-cut optimists.
  • Market begins to track back from expectations of six cuts in 2024.
  • Japan’s Nikkei in reach of slaying its 38-year bubble-era dragon.

Like an unwanted party guest, US nominal CPI spiked to a hotter-than-expected 3.4% y/y increase in December, compared with 3.1% in November and consensus expectations for a modest gain of 3.2%.

UK inflation data also gate-crashed the party, rising for the first time in 10 months in the final month of 2023, driven by increases in alcohol and tobacco prices and exceeding economists’ 3.8% consensus forecasts.

European Central Bank president Christine Lagarde later added a midweek warning that that borrowing costs would come down in the summer rather than spring.

Both equities and bond yields faded in response, with the S&P 500 losing as much as 1.7% from its previous-week peak. The FTSE 100 followed suit, losing 1.1% midweek following Lagarde’s comments.1 

For Phil Orlando, Chief Equity Market Strategist at Federated Hermes, the latest news on inflation plays into a theme of equity market cooling following a strong finish at the end of Q4.

“The S&P 500 enjoyed a powerful 16.8% rally over a nine-week period into year-end 2023 – making for its longest winning streak since 2004,” he says. “But the start to the New Year has been difficult, with negative readings on both the Santa Claus Rally indicator (down 0.88%) and our Early January Barometer indicator (down 0.13%).”

Post-December relative returns (%)

VIX - volatility revisited

Orlando maintains his forecast of a choppy and volatile 2024 with US rate cuts towards the back of 2024 in the wake of slowing growth.

However, this comes with a note of caution about the more upbeat expectations in some corners of the market. “The Fed has said repeatedly that it will be patient and vigilant regarding inflation,” he warns. “In our view, the market is overly optimistic that the Fed will cut interest rates six times this year, with the first coming in March.”

It's been a long time

Elsewhere, the big news for the week was Japan’s Nikkei benchmark finally coming within touching distance of its 1988 all-time high of 38,915 at the peak of the Showa-era bubble economy. With a 6% surge year to date, it has already surpassed 35,000 – a level not seen since the first quarter in 1990.

The Nikkei's return

Geir Lode, Head of Global Equities at Federated Hermes Limited, notes this surge has been helped by foreign investors allocating capital to the Japanese market even as analysts forecast a modest level of economic growth. Here, slowing domestic demand and weakening exports will play a part, as will Japan’s continued demographic headwinds.

“However, leading indicators predict Japan’s long battle with negative interest may turn in April,“ says Lode, “and this is creating a supportive environment for Japanese companies to rally.”

He concludes: “A cocktail of bullish investor sentiment towards Japan, a shift towards positive interest rates, and attractive valuations makes Japanese stocks attractive.”

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