Weekly Market Update January Monday 17th 2022

US inflation hits a near 40-year peak

Despite a brief rally intra week, growth stocks, led by technology, continued to sell off this week as the latest inflation data for the US, as represented by the consumer price index, continued to rise. The index rose 7% for the year to the end of December, its fastest pace of increase for almost forty years. Whilst this was in line with market expectations, the figure for the month of December exceeded forecasts, coming in at 0.6%. To further confirm the inflationary picture, the latest Producers Prices Index, which measures prices that producers receive for their finished goods, increased by 9.7% for the year.

The yield on 10-year US Treasuries, having touched 1.8% on Monday, has now moderated to 1.74%, but remains sharply higher than one month ago when it was trading beneath 1.40%. The market is currently pricing in four US interest rises this year, with the first hike expected in March, taking the Fed funds rate to 1% if this is borne out. Futures markets are also pointing towards moderating inflation, and with several rate hikes already priced in, the US dollar actually weakened this week despite the strong inflation data, providing a much-needed fillip to emerging markets.

As of 12pm London time on Friday, US stocks fell 0.4% over the week whilst US technology stocks declined by 0.9%, taking them down almost 8% since their peak last November. European equities lost 0.8%, whilst the more economically sensitive UK market rose 0.4%. Japanese equities gave up 0.9%, and Australian stocks similarly fell 0.9%, whilst emerging markets rose 3.0% with Latin America rising 4.6%. At a broad sector level globally, it was energy, materials and financials that led the way, whilst technology was the notable laggard.

Government bond yields in Germany and the UK also moderated this week, with the 10-year bund now trading at -0.07% and UK gilts 1.13%, whilst both being sharply up versus one month ago.

Gold rose 1.3% to $1,821 an ounce, with copper rising by just over 2% and Brent crude oil up over 4%, priced at $85.2 a barrel.

Issues under discussion

Inflationary numbers continue to climb

Whilst inflationary numbers continue to climb to new highs, there is at least some consensus that inflation will peak this year, probably by the summer for the US economy and earlier for Europe. However, thereafter is where the divergence in views become stark. Those on the transitory side of the debate expect inflation to fall to levels closer to what we had become accustomed to pre-pandemic, whilst those on the inflationary side believe inflation will remain at levels close to 4% or 5% in the US. The latter view would leave the Fed still having to do a lot of heavy lifting if interest rates have only reached 1%, whilst the former view may see less than four rate rises if the Fed interprets a drop in inflation as transitory, even if it is too early to call.