Market Update

This week's highlight was the unveiling of the latest US CPI inflation figures. Once again, the result, at 7.5%, surpassed major economists' predictions, which stood at 7.3%.
It's somewhat puzzling that these prominent economists continually misjudge their forecasts. Given that inflation is a trailing economic indicator, it should be relatively predictable. As we've frequently emphasized, the current inflationary surge is primarily attributed to supply-chain issues rather than a dramatic surge in demand. This can be deduced from numerous companies citing supply hiccups and bottlenecks, along with elevated commodity prices.
To illustrate, Brent oil's price per barrel has shot up over 50% from last year and is almost 15% higher than the outset of this year. Therefore, it's not surprising that we've been cautioning about a bias towards short-term inflationary spikes.
Despite compelling reasons to advocate for a slight uptick in interest rates, it seems the financial markets might be overlooking the limited influence policymakers have on today's inflation, which is largely artificial.
Similarly, there seems to be an underestimation by the financial markets about how rapidly inflation could recede. This week, Goldman Sachs projected the US central bank might hike interest rates seven times this year in light of inflation. Additionally, James Bullard, President of the Federal Reserve Bank of St. Louis, expressed his inclination for a 1% interest rate increase by early July and didn't rule out a rate hike before the Fed’s upcoming policy meeting on 16 March 2022.
Such aggressive postures seem excessive to us. An unscheduled rate hike, for instance, could dent the Fed's reputation, especially after they've clearly stated that they wouldn't raise rates during the QE program's tenure, set to conclude in March.
While it's plausible that the Fed might initiate a 0.5% rate hike in March, we perceive it as them front-loading their monetary tightening. This would subsequently give them the flexibility to adopt a more measured approach, observing inflation trends and assessing the economic impact of increased energy costs and fiscal restraints.
As we peer into the next week, the agenda includes minutes from the last Fed gathering on 26 January 2022, alongside CPI inflation data from the UK, China, and Japan; PPI figures from the US & China; retail stats from the US & UK; Q4 GDP numbers from the Eurozone & Japan; and UK job metrics, including unemployment rate and weekly earnings.