14th March 2023

Good morning,

Positive start to 2023 even with a February “higher for longer” wobble. But we think the trend of downwards inflation continues and market can see through the short- term volatility.
Inflation is easing but recent data points are suggesting this may take a bit longer than recently anticipated by the market.
The recent inflation data have led to a sharp rise over the past month in the market’s expectations for the Fed Funds rate. Similarly, longer-term Treasury yields (10yr) have risen to 4% and put some pressure on equities.
Although yields have risen again, the impact, so far, is less bad for equities compared to 2022 as yields on the debt of highly-indebted companies has not risen nearly as aggressively as it did in 2022. The market is suggesting, therefore, there is less concern of a generalised sharp slowdown in economic activity and knock-on impact on corporate earnings than it did in 2022.
Markets tend to rally before earnings bottom. It is consistent with previous market recoveries that stock markets can rally even while economic data is weakening.
Valuations are reasonable, not as cheap, but offer some support.
Recent “hawkish” comments from Powell have moved market consensus from a 25bps raise to a 50bps raise this month.


Risks

Inflation falling but at a slower pace. The US employment market remains extraordinarily tight, despite all the rate rises from 2022. Forthcoming employment market data can be impactful (eg Change in “Nonfarm Payrolls” this Friday).
Fed “Higher for Longer” policy risk leads to Recession. Equities fall as earnings are cut much aggressively. Watch upcoming inflation data, Fed comments and repricing of rate rises.

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