More fun at the fair as US inflation takes centre stage again

It was another decent week for equity and bond markets, reflecting the hope that the outlook for the economies of Europe and the UK is starting to improve. Along with the largest economy in the world is slowing just enough to hopefully allow the Fed the opportunity to pivot as the term goes at some point this year. A good example of how economic sentiment may be changing was last Friday’s Michigan Consumer Confidence survey, which reported quite a drop in both sentiment and expectations. Possibly reflecting that some of the excess savings many believe responsible for helping support the US economy during this period of rising interest rates have been exhausted, along with signs of a weaker labour market now making the US consumer more cautious. Optimism abounds for equities as the S&P 500 three-month implied volatility indicator hits the lowest level since January.

Many will start to point to the valuations the recent rise in US equities has put on the S&P 500, as it now once again trades over 20x forward earnings. The equity risk premium, i.e. the additional return one should expect for taking the additional risk in equities, has disappeared. However, selling US equities just because they look expensive has often been a mistake in recent years, but it is something to be cognisant of.

This week will be another test for the interest rate outlook, as lucky old us get three days of US inflation data. On Monday, the New York Federal Reserve publishes its monthly survey of consumers’ inflation expectations, then on Tuesday, the Labor Department’s report on producer prices, bringing up the rear on Wednesday, the biggy, consumer prices. These reports could well have a significant influence on interest rate sentiment in the coming months. Ahead of these reports, expectations are not for much, if any, of further price deceleration. Economists’ consensus estimate calls for a 3.4% year-over-year increase, which would be down by a tenth of a percentage point from March. The core CPI, which excludes food and energy components, is expected to rise by 3.6% year over year. In its weekly outlook, S&P Global notes that early PMI data releases have hinted at US inflation slightly easing into the start of the second quarter of 2024, which, alongside recent indications of a slowdown in US hiring and wage growth, have helped to boost market sentiment. We shall see.

The UK’s economy’s outlook was boosted by last week’s better-than-expected GDP report. This week, we will get the March labour market report on Tuesday. There’s quite a lot coming from Europe this week, including the ZEW sentiment survey, the Eurozone Q1 GDP estimate, employment change and industrial production, and the Eurozone Inflation final estimate for April. As we start the busy week, equities markets look to have another positive start.