Is U.S. inflation still meeting expectations?

On the latest edition of Market Week in Review, Senior Quantitative Investment Strategy Analyst Kara Ng and Consulting Director Sophie Antal Gilbert discussed newly-released data on U.S. inflation, the impact of U.S. withdrawal from the Iran nuclear deal on oil prices and the recent performance of emerging market equities.

April CPI numbers show inflation still trending upward in U.S.

Data from the U.S. Department of Labor’s Consumer Price Index (CPI) report for April, released May 10, showed that the country’s rate of core inflation increased 2.1%, year-over-year, Ng said. “While this was slightly below consensus expectations, the new number indicates that the overall trend of a gradual uptick in inflation in the U.S. still holds,” she stated. Markets reacted positively to the report, Ng noted, with the S&P 500® Index rising almost 1% from open to close on May 10. Why? “The April CPI data took pressure off interest rates and the U.S. dollar, both of which had been recent headwinds for markets,” she said.

As to whether or not the report could influence the U.S. Federal Reserve (the Fed)’s rate-hike plan for 2018, given that the numbers were a notch below what most industry analysts were expecting, Ng said that the central bank is unlikely to be swayed. “I believe there’s a high hurdle to meet in order to slow down the Fed’s plan for interest rate increases, given that the U.S. unemployment rate has fallen to 3.9%,” she said, adding that her and the team of Russell Investments strategists continue to anticipate a total of three or four rate hikes this year.

Oil prices surge after U.S. quits Iran nuclear deal

Shifting to commodities, Ng said that U.S. President Donald Trump’s decision to withdraw the country from the Iran nuclear deal on May 8 quickly led to a spike in oil prices. For instance, the cost of a barrel of U.S. West Texas Intermediate crude oil rose by roughly 3% the following day, she noted.

“Since the market has already reacted very strongly to Trump’s announcement, the team of strategists at Russell Investments is neutral on oil in the short run,” Ng said—“but over the next 12 months, we’re bullish.” Why? Ng explained that the cost of oil typically rises late in the market cycle as global demand picks up. In her view, oil prices could increase by roughly another 5% before supply catches up to demand.

Are brighter days ahead for emerging market equities?

Turning to emerging market equities, Ng noted that the asset class has struggled somewhat in 2018, per the MSCI Emerging Markets Index, after a very strong performance last year. The main reason why is due to the recent strength of the U.S. dollar, she said—because emerging market companies have a lot of debt that’s denominated in dollars. “When the dollar strengthens, repaying U.S. dollar debt or rolling over new loans becomes costlier, which hurts emerging market companies,” she explained.

The greenback has strengthened roughly 4% since mid-April, per the U.S. Dollar Index, Ng said, but she believes that won’t be the case much longer. “Going forward, I expect the dollar to be flat, which should unlock the potential for some outperformance in emerging markets,” she said. Combined with the relatively cheaper valuations seen across emerging markets, Ng stated that her and the team of Russell Investments strategists’ preferred position for emerging market equities remains overweight.

Watch the video. And subscribe.