Inflation continues to dominate markets, with the latest consumer price index for the US having been released on Thursday showing a further acceleration, taking headline inflation to 7.5%, its highest level since 1982. This follows last Friday’s latest US employment data showing 467,000 new jobs having been created in January versus forecasts of 150,000, and average earnings jumping by 5.7%. However, although the inflation data was ahead of expectations, judging by market pricing, investors are reflecting changing views around future monetary policy rather than longer-term expectations for inflation. Futures markets continue to price in inflation expectations around an average of 2.5%, a figure that has not materially changed since September of last year.
On the back of this latest inflation data, US markets sold off on Thursday, with other markets following suit on Friday. Nonetheless, over the week, most equity markets remain in positive territory having enjoyed a recovery rally post the previous inflation-induced selloff.
As of 12pm on Friday, London time, US equities were up 0.1% over the week, whilst US technology stocks rose 0.6%. European stocks increased by 1.3%, as did UK equities, whilst Japanese and Australian stocks rose by 1.7% and 1.4% respectively. Emerging markets added 2.5%, with a particularly strong showing from Latin American markets which increased by 4.4% in aggregate.
The yield on 10-year US Treasuries, which moves inversely to price, touched 2.05% in intraweek trading, its highest level since mid-2019. It has since moderated a little, trading at a yield of 2.00%. James Bullard, the president of the St Louis Federal Reserve and a voting member of the rate-setting Federal Open Market Committee, said on Thursday that he would like to see the Fed funds rate rise by 1% by July. This would imply four quarter of a point rate increases as a minimum at each rate meeting between now and then, whilst the market is currently pricing in six quarter of a point rate hikes over the year. 10-year German bunds are trading at 0.26%, whilst equivalent UK gilts have risen to a yield of 1.52%.
Gold traded up by just over 1%, now priced at $1,827 an ounce. Copper rose by 1.6%, currently trading at $10,305 and iron ore rose by over 2.5%. However, after a very strong run, crude oil took a breather, with Brent falling by 0.9%, currently priced at $92.4 a barrel and US WTI (West Texas Intermediate) falling by 1.4%, trading at $91.0.
Although the US dollar index rose by 0.4% over the week versus a basket of internationally traded currencies, emerging market currencies in aggregate increased by 0.9% versus the dollar, coming from a low base. Historically, the US dollar has often peaked as US interest rates start to increase, which would be a positive catalyst for emerging markets, especially those reliant on international markets to fund their borrowing.
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