A welcome reprieve: U.S. core inflation slows

2025-01-17




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hi and welcome to Market weekend review my name is Alex kley I'm a senior investment strategist based out of Sydney uh I want to talk today about three things so the first is the US inflation Outlook and the US inflation print that we got the second is the start of us earning season and the third is what is going on in China particularly around the credit numbers that we got this week so if we kick off with us CPI so we've talked before in previous episodes about the fact that us Bond deals have been r quite a bit since uh December when the worries about more inflation and what that could mean for interest rates going forward we got a bit of reprieve this week with us CPI coming in slightly below expectations so us core CPI was 0.2% month on month expectations were for at 0.3% so a welcome reprieve and we saw bond yields move quite aggressively on the back of that and are now sitting at 18 Basin points below where they were before that print we still think that us bonds look fairly attractive on valuation and going forward we think that they still have a very strong place in a multi-asset portfolio if we move across to equities now we've seen Global equities as of Thursday close up about 2% the one of the key things that's come through is the start of earning season with the banks reporting and generally it's been a pretty constructive environment for banks through Q4 we see most of the banks deliver better earnings than expected and in the case of some of them announcing quite large stock stock BuyBacks so that's again and the Outlook that they have given uh is an improvement so that has been encouraging on the financial side and we'll see what rolls through for the rest of the earning season expectations are fairly robust at about 5% if you strip out the mag seven or the Magnificent 7 tech names and then finally in China so close to my home China is still stuck in this fairly soft growth environment where you have the property drag and soft consumer confidence that's putting the economy into risk of Def infation we've seen some fairly some very soft inflation prints since the start of December we've started to see some pick up in property transactions so China's been trying to encourage more property transactions over the last six months and at least in the very near to it looks like we're starting to see a bit of an improvement there it's probably too early to say that it has completely bottomed out and on the back of that we saw credit numbers this week showing a very small tick up in mortgage lending so there has been a little bit of an improv Improvement in mortgage demand looking ahead though I think the key focus is going to remain on what happens with government policy do we see more announcements of stimulus we're coming up to some pretty pretty big meetings including in March we have a meeting of the national people's Congress where we will get likely the growth Target for the economic growth Target as well as the other watch point is what happens with the new US Administration in terms of tariffs and how China response to them so there is a you know a couple of small green shoots for China but generally the focus is going to remain on stimulus and I think that's going to be the big Focus for our region uh this year so thank you again for tuning in we look forward to seeing you next time hi I'm Sophie Anto head of portfolio and business Consulting at Russell Investments if you liked what you just saw and heard consider subscribing to our YouTube channel or check us out on LinkedIn thanks for tuning in

Executive summary:

  • U.S. core consumer-price gains eased during December, sparking a rally in bonds 
  • Q4 earnings season is off to a strong start
  • The potential for additional fiscal stimulus in China will be a key watchpoint for investors this year

On the latest edition of Market Week in Review, Director and Senior Investment Strategist Alex Cousley discussed recently released U.S. inflation data as well as the start of U.S. fourth-quarter earnings season. He also assessed the latest Chinese credit numbers and shared key investor watchpoints for China in the months ahead.

U.S. government bonds rally after encouraging inflation report

Cousley kicked off the segment by noting that the December CPI (consumer price index) report for the U.S. was published by the Bureau of Labor Statistics on Jan. 15. The core CPI came in slightly below expectations, he said, rising 0.2% from November versus the consensus forecast for a 0.3% gain. On an annualized basis, the core CPI ticked down to 3.2% in December from 3.3% one month earlier, Cousley added.

“This report was a welcome reprieve for fixed income markets, which have been under pressure since December over concerns that inflation could reaccelerate, which could keep interest rates at higher-than-expected levels,” he explained. Cousley noted that the yield on the 10-year U.S. government bond, which spiked to near 4.8% on Jan. 13, fell sharply in the wake of the report. As of market close on Jan. 16, it stood at roughly 4.62%—18 basis points lower than at the start of the week, he said.

“Overall, we still think that U.S. bonds look fairly attractive from a valuation standpoint—and we believe they still have a very strong role to play in a multi-asset portfolio,” Cousley remarked.

The early read on Q4 earnings season

Next, Cousley discussed U.S. fourth-quarter earnings season, which kicked off earlier in the week with some big banks reporting. He said that so far, most banks have delivered better earnings than expected, with some also announcing large stock buyback programs.

“Generally, banks have also been reporting an improving outlook, which has been encouraging news for the financials sector,” Cousley said.

While the overall U.S. earnings season is still in its early days, growth expectations for Q4 are quite robust, at around 5% if the Magnificent Seven tech names are excluded, he noted.

What do the latest credit numbers from China suggest?

Cousley wrapped up with a look at the growth environment in China, which he noted remains fairly soft due to struggles in the country’s property market as well as weak consumer confidence. “The combination of the two has put the Chinese economy at risk of deflation,” he said, adding that the latest inflation numbers from China have been very weak.

However, Cousley noted that since the start of December, there has been a pickup in the amount of property transactions. “The Chinese government has been trying to encourage more of this over the last six months, and—at least in the very near-term—it does look like we’re starting to see a bit of an improvement in this area,” he stated. In addition, the latest credit numbers also showed a very small uptick in mortgage lending, pointing to an improvement in mortgage demand, Cousley noted. All that said, it’s probably still too early to conclude that China’s embattled property sector has bottomed out, he remarked.

Looking ahead, Cousley said he thinks the key focus for investors this year will remain around fiscal policy. “At Russell Investments, we’ll be watching to see if the Chinese government announces any additional stimulus,” he said, noting that several big meetings are looming, including the National People’s Congress in March. It’s at this meeting that the government will likely unveil the economic growth target for 2025, Cousley noted. Another important watchpoint for China will be whether any potential tariffs are imposed by the incoming U.S. administration—and how the government responds, he added.

“Overall, while there are a few small green shoots emerging, I expect stimulus to be the main focus for China in the year ahead given the economic situation,” he concluded.

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