Market Update

Hawkish central bank policymakers found plenty to be excited about this week as US CPI inflation readings exceeded expectations, contributing to a week of volatility that saw global equity markets finish lower.
In August, US inflation came in at 8.3%, surpassing economists' expectations of 8.1%. This development all but ensures a 0.75% interest rate increase when the Federal Reserve convenes for its policy meeting on Wednesday, September 21, 2022, with some economists even anticipating a full 1% increase.
However, we believe that the market's reaction was somewhat exaggerated. While the inflation reading exceeded expectations slightly, it was still lower than the previous month's figure of 8.5% and significantly down from June's reading of 9.1%.
Furthermore, the supply chain disruptions and increased energy costs, which have been major contributors to the inflation spike, have largely cycled through the year-on-year inflation calculations. Consequently, we anticipate that inflation readings will continue to decline in the coming months.
Additionally, today's (Friday, September 16, 2022) long-term inflation expectations data from the University of Michigan indicated that the 5 to 10-year expected inflation rate continued to decrease, registering at 2.8% for September. This is a positive sign, suggesting that the current high inflation is unlikely to become deeply entrenched.
In a related development, FedEx, the US-based delivery company, announced this week that it would be withdrawing its earnings forecast. This move is a clear signal that the US (and global) economy is slowing, and thus, the economy doesn't require aggressively higher interest rates.
As we have previously emphasized, we believe that the Federal Reserve's planned aggressive interest rate hikes are more likely to push the US economy into a recession. Consequently, policymakers may soon be compelled to pivot and begin reducing interest rates, a move that would bode well for equity prices.
In the UK, the inflation rate was expected to drop to 10.0% from 10.1%, but it actually came in at 9.9%. However, it remains uncertain what the Bank of England policymakers will decide when they convene on Thursday, September 22, 2022. Policymakers have hinted at the possibility of joining the trend toward larger interest rate increases. Still, the introduction of Liz Truss' energy price cap should help curb UK inflation, reducing the urgency for policymakers to act aggressively.
Moreover, as is the case in the US, we don't believe the UK economy can absorb higher interest rates. This view was underscored by this week's UK retail sales data, which revealed a 1.6% drop in August sales compared to an expected decline of just 0.5%.