U.S. inflation surges. Did markets notice?

On the latest edition of Market Week in Review, Consulting Director Sophie Antal Gilbert and Chief Investment Strategist Erik Ristuben discussed the latest U.S. inflation data and its impact so far on financial markets.

Markets unfazed by stronger-than-expected U.S. inflation reports

The U.S. Bureau of Labor Statistics released two key inflation data points for January the week of Feb. 12, Ristuben said: the Consumer Price Index (CPI) and the Producer Price Index (PPI). In both cases, the numbers were higher than expected—with the CPI increasing 0.5% from December, and the PPI rising 0.4%. “There was ample concern among many analysts that if these numbers came in on the strong side, markets would have a negative reaction—perhaps similar to the sell-off the week of Feb. 5,” Ristuben said. However, markets appeared to shrug off both reports, he noted. Why? “It’s possible that after the initial shock of higher inflation, stemming from the U.S. jobs report on Feb. 2, the market may be going back to its former complacent self, like in 2017,” he said—“but I don’t think this will last very long.”

Why? Ristuben and the team of Russell Investments strategists believe that, all things considered, 2018 will be a year marked by higher volatility in equity markets—primarily because they see a rise in recessionary fears during the second half of the year. As for the first half? “We think it’ll probably still be good for stocks—as our viewpoint remains that the recent sell-off was a healthy correction, and not the start of a bear market,” he stated.

Global stock market performance: On the upswing as well?

Broadening his gaze toward global markets, Ristuben said that both developed and emerging markets typically have mirrored the performance of U.S. markets over the past two weeks. “What this means is that, generally speaking, they went through the same ups and downs, in the same direction and magnitude,” he explained. For instance, the rally observed in U.S. equities the week of Feb. 12—as evidenced by the S&P 500® Index’s 4.9% gain when compared to the previous week—was somewhat similar to the STOXX® Europe 600 index’s gain of 3.8%. Emerging markets, said Ristuben, did even better, ending the week of Feb. 12 up 5.25% in comparison to the week of Feb. 5, per the MSCI Emerging Markets Index.

What might this mean in light of the recent market decline? “I think it’s probably even further proof that markets see the downturn earlier this month as a correction, and nothing more” Ristuben said.

UK retail sales: What’s behind the disappointing numbers for January?

Turning to the UK, Ristuben said the January retail sales numbers released by the Office for National Statistics (ONS) were sluggish, increasing by only 0.1% from December. Why? “The inflation rate in the UK—which came in at 3%, per the ONS—is largely to blame,” he explained—“as it’s hampering retail sales, which in turn is putting a restrictor plate on the UK economy at large.”

Because of this, Ristuben is of the view that the Bank of England won’t be able to raise interest rates any time soon, despite the central bank’s recent hawkish comments. “Simply put, I don’t think the market or the economy will allow them too,” he concluded.