U.S. inflation eases. How could this impact the Fed’s rate – hiking campaign?

On the latest edition of Market Week in Review, Investment Strategist Alex Cousley and Research Analyst Laura Bardewyck discussed recently released inflation numbers for the U.S. They also chatted about expectations for U.S. fourth – quarter earnings season as well as the growth outlook for China in 2023.

U.S. inflation cools again in December

Bardewyck and Cousley kicked off the conversation with a look at the U.S. consumer price index (CPI) report from December, which was released by the Labour Department on 12 January. Cousley said that both the headline and core inflation numbers aligned fairly closely with consensus expectations, and marked a continued deceleration in the pace of price increases. December's year – over – year increase of 6.5% in headline inflation, for example, was the smallest increase since October 2021, he said. Cousley noted that shelter costs did rise 0.8% on a month – over – month basis, but said that he expects increases in this category to slow in the coming months.

Turning to the U.S. employment report for December, which was released on 6 January, he said that wage growth moderated a bit, with average hourly earnings rising at a 4.6% clip – versus 5.1% in November. "While this is encouraging to see, it's still too high of a number – it's pretty far away from the U.S. Federal Reserve (Fed)'s goal of 2%," Cousley remarked. He noted that recently released data from the Atlanta Fed's wage tracker told a similar story, with annual wage growth decelerating to 6.1% in December from 6.5% in November.

Altogether, this latest batch of data suggests that the Fed will likely opt to increase the overnight rate by 25 basis points at its 31 January – 1 February meeting, Cousley said. This would be the smallest rate increase since the U.S. central bank kicked off its aggressive tightening campaign last March, he noted.

What to expect during Q4 earnings season

Turning to fourth – quarter earnings season, which kicks off 13 January with several large banks reporting results, Cousley said consensus expectations are for a further slowdown in earnings growth, with growth for the S&P 500 projected to decline by 4.1% on a year – over – year basis. "This number would actually be even more negative if it wasn't for the strong performance of the energy sector in the fourth quarter," he added.

Revenue forecasts for the fourth quarter have also been lowered substantially, Cousley noted, with analysts now expecting year – over – year revenue growth of 3.8%. "That's much lower than the estimated rate of almost 7% growth projected back in September," he remarked, noting that the current projections still seem too high if a U.S. recession is indeed around the corner. In Cousley's opinion, there's a roughly 55% chance that the country will slip into a recession at some point this year.

What's the growth outlook in China for 2023?

Bardewyck and Cousley wrapped up the segment with a look at the 2023 growth outlook in China, where an economic reopening is underway as the country lifts its stringent zero – COVID policies . Cousley said that China is currently grappling with a massive COVID – 19 outbreak, although it's unclear exactly how many infections the country has recorded. "With the Lunar New Year coming up, travel volumes are expected to be high, and this will probably exacerbate the current situation," he remarked.

That said, Cousley stated that once the COVID – 19 wave passes, the economic backdrop looks fairly decent for China. He explained that the government recently eased credit restrictions for real – estate developers in order to bolster the country's sagging property market. "In order for China to achieve solid growth this year, property prices and the property market itself will need to stabilise and perhaps start to recover – and I think this could potentially happen in some of the larger Chinese cities," Cousley stated. If this does occur, it could unleash a big wave of consumer spending, he said, as there's currently a huge amount of excess savings among wealthy individuals in China.

Cousley said that China's December credit numbers are hard to read too much into, because they were probably impacted by the onset of the current COVID – 19 wave. For instance, mortgage demand in December was quite soft – yet that's probably because very few individuals were going out to inspect properties as infections started spreading, he explained.

In addition, as government bond yields rose, a lot of wealth – management products had big redemptions, which led to a decline in corporate bond issuance, Cousley said. "Ultimately, while China's credit numbers were worse than expected, they were largely driven by esoteric factors rather than a wholesale softness in credit demand," he concluded.

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Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.