Red-hot: U.S. inflation surges at blistering pace
On the latest edition of Market Week in Review, Investment Strategy Analyst BeiChen Lin and Senior Client Investment Analyst Chris Kyle reviewed the latest inflation readings from Canada, the UK and China. They also unpacked the U.S. Federal Reserve (Fed) meeting minutes from January and discussed potential market implications of the Russia-Ukraine conflict.
Inflation surges in UK and Canada, moderates in China
In similar fashion to the U.S., January inflation numbers in both Canada and the UK reached their highest levels in decades, Lin said, with Canada’s headline consumer price index (CPI) climbing by 5.1% last month, on a year-over-year basis. “Not only was this number above consensus expectations for a 4.8% rise, but it marked Canada’s steepest increase in headline inflation since 1991,” he noted. Lin added that core inflation-which strips out gasoline prices-also rose sharply in January, increasing at a 4.3% clip.
Meanwhile, in the UK, consumer prices soared 5.5% last month on an annual basis-topping December’s elevated reading of 5.4% and reaching a 30-year high, he remarked. The ongoing surge in inflation across the globe is placing increased pressure on central banks to tighten monetary policy, Lin said, pointing out that markets are pricing in a significant number of rate hikes this year in Canada, the UK and the U.S. “Depending on how the data plays out, it is possible that we may not see as many rate increases as what’s currently being projected,” he noted.
Lin said the inflation story for January was a little different in China, with the country’s CPI rising by just 0.9% on a year-over-year basis-compared to a 1.5% increase in December. In addition, on the producer side, factory-gate inflation-as measured by the country’s producer price index (PPI)-fell to its lowest reading in the past six months, he observed.
The cooldown in inflation is important for two key reasons, Lin noted, with the first being that Chinese authorities now have more flexibility to implement policy accommodation measures to help bolster the economy. “This is a big deal, because China's growth rate is expected to slow this year,” he stated.
The second reason that makes the data noteworthy is that, traditionally, factory-gate inflation from China tends to lead developed-market inflation by about six months-suggesting that pricing pressures may begin to ease in the U.S., Canada and the UK during the second half of 2022, Lin said. “A moderation in inflation during this timeframe would be consistent with the expectations of our strategist team,” he noted.
Fed meeting minutes emphasize data-dependent approach
Shifting to the Fed, Lin said minutes from the U.S. central bank’s January meeting largely reaffirmed what Chair Jerome Powell noted at the 26 January press conference. “The minutes showed that officials saw both upside and downside risks to the U.S. economy, with hotter-than-expected inflation a key risk to the upside and the omicron variant of COVID-19 the main risk to the downside,” he said. Above all else, the minutes demonstrated that the Fed has embraced a data-dependent approach to adjusting monetary policy-and that it wants to avoid taking any abrupt action.
“I believe the messaging from the Fed minutes shows that a 25-basis-point (bps) rate hike at the upcoming March meeting-rather than a 50-basis-point increase-is more likely,” Lin remarked, adding that participants didn’t really discuss the possibility of raising rates by 50 bps at the January meeting. He also noted that several FOMC (Federal Open Market Committee) members have recently suggested that a 25-bps increase is probably more appropriate.
Market pricing has also shifted toward this, Lin said, with the CME Group’s FedWatch Tool indicating a 70% chance of an increase of this magnitude at the March 15-16 meeting. This is a change from the week of 7 February, he noted, when markets were largely expecting an increase of 50 bps in the federal funds rate. However, Lin cautioned that what happens at the next Fed meeting remains very dependent on the latest data pertaining to inflation, economic growth and unemployment.
Russia-Ukraine tensions spark market volatility
Turning to recent market performance, Lin said that tensions between Russia and Ukraine have made for a bumpy ride for investors, as evidenced by the 622-point tumble in the Dow Jones Industrial Average on 17 February.
“Investors are becoming more concerned about what possible actions the Russian government might take against Ukraine, and that’s led to more signs of investor pessimism in recent days,” he stated. While there’s definitely a possibility that markets could decline further if tensions continue to escalate, Lin stressed that it’s important to remain focused on the long-term picture. “Ultimately, we’re still expecting above-average GDP (gross domestic product) growth in the U.S. and many other countries this year-and I think that’s what investors should really be keeping in mind,” he concluded.