Prices rising, stocks rising the underlying economic picture in the US trending lower

Without going into the details, and probably to no real surprise, the release of the latest monthly US inflation data exceeded expectations. Consumer and Producer prices rose month over month by more than economists had forecast. The year-on-year consumer price index came in at 3%; last September, the year-over-year rate was 2.4%. As I have explained before, the 2-year government bond is considered the most sensitive to changes in interest rate sentiment. Prices fell, and yields rose this week on the news, but not by a material amount. Telling you the bond market was mostly already ahead of the data; the US dollar basket index fell.

US 5-year inflation expectations continue to rise closer to 3% than 2%. One could have expected equities to fall on the news as this news could reinforce Jerome Powell’s testimony that the Fed are in no hurry to cut interest rates further. After a little wobble this week, the equity market rallied; ultimately, real assets are the go-to asset to own in periods of persistent inflation. Inflation leads to the devaluation of the domestic currency, the rise of real assets, and bondholders’ suffering.

Looking at the underlying sentiment data, the picture is mixed. Firstly, the Citi economic surprise index has been trending lower since the start of the year. Also, the NFIB Small Business Sentiment Index retreated from its December high last month. Midcap stocks are struggling relative to larger caps. According to the latest S&P Global PMI survey, investment managers are becoming cautious about stocks, as they appear bearish on the near-term outlook. Consumer staples have been outperforming discretionary ones. So far, the Vix index remains close to its historic lows, although equity options volumes are trading higher.

Finally, this week marked the 50th anniversary of Margaret Thatcher’s election as leader of the Conservative Party.