Inflation back on top of fear list for nervous investors

And entertainment. After months of squabbling over performance, celebrities in US politics have finally agreed to give the country more freedom to borrow, a move aimed at quelling the risk of a catastrophic default. for the country’s government bonds.

Averting a disaster in the so-called core risk-free assets of the world, this is the triumph of common sense.

If you’re heavily invested in chipmaker Nvidia and other major US tech stocks, you’re living your best life regardless of this whole pantomime. For others, the debt ceiling deal is a rare piece of good news in a year of anxiety, as HSBC beautifully summed it up this week.

Max Kettner, the bank’s director of multi-asset strategy, wrote this week: “A recap of the first five months of 2023 is more of a dying man’s playlist than anything else. In addition to the controversy over the US debt ceiling, fund managers have faced a series of US bank failures, alarms of a credit crunch and constant warnings of a potential financial crisis. Terrible performance in corporate earnings.

It is clear that risk markets continue to move higher anyway. To be sure, US stocks in particular are dominated by a small group of high-flying names, without which they would be flat this year. Opinion is divided on whether it is cause for alarm or not. Either way, the S&P 500 is up about 10% so far in 2023 despite the risk list and harsh warnings of impending disaster. Even Kettner, who has been bullish on risky asset prices all year, is worried that this has gone too far.

The question now is whether removing the U.S. default from the agenda will pave the way for some new strong rally in the U.S. and indeed in global equities. The implication is that it is a necessary prerequisite, but probably not sufficient.

Mark Haefele, chief investment officer at UBS Global Wealth Management, wrote: “The rally needs more. “While the prospect of a [debt ceiling] settlement is positive on risk sentiment and could support equities in the near term, we still think the risk-reward balance for US equities in general remains unfavorable in the context of other macro challenges.”

At the risk of sounding like a broken record, you guessed it, at the top of that list of macro challenges is inflation – the corrosive force that chewed and spit out fund managers last year with How to hurt both stocks and bonds. Very few people care about running again.

Evidence that the dreaded i-word simply doesn’t back down is everywhere. The UK is something of an exception, of course. But core inflation is proving uncomfortable and food prices are up nearly 20% over the past year. struggling thing. Meanwhile, the US Federal Reserve’s preferred measure of inflation – personal consumption spending data – remains controversial. Core PCE demonstrated earlier this month was 4.7% a year, well above the Fed’s target. A quick return to low inflation and, importantly, stable inflation is stubbornly refusing to materialize.

“People talk about the peak of inflation, but they don’t see the next wave coming,” said Frédéric Leroux, head of cross-assets at Carmignac in Paris. “We had the first peak, but there will be a series of peaks in the coming years.”

Investors and analysts routinely infer, he said, that the rapid rate of price increase following the Covid shutdowns has a major fixable cause – the closure and reopening of global supply chains. demand – and another more difficult cause: the war in Ukraine.

Instead, broader interconnected forces are at play, from repatriation to a global geopolitical reset to a green energy transition, all of which lead to high structural inflation. more for decades to come. “The market thinks inflation is temporary,” Leroux said. “It can’t.”

For him, this strengthens the case for active rather than passive fund management, to steer clear of growth stocks, especially in the US, and instead towards unloved pockets of value. . He is attracted to Japan, Europe and Asia. “We have this big wave [of investor interest] from west to east,” he said.

Michael Saunders, formerly a member of the Bank of England’s monetary policy committee and now a senior policy adviser at Oxford Economics, thinks this could be a bit pessimistic.

“Inflation is not going to go away as quickly as it came,” he said. “The ‘perfect deflation’ where it went up and then back down now makes less sense now. But I believe central banks will eventually get there. So we’re not going to have structurally higher inflation, but we’re going to have structurally higher rates to make sure it doesn’t last.”

This message is interrupting. Expectations of a US interest rate cut to ease the strain in the banking system are now fading. Futures markets have moved from predicting that the Fed’s next move will provide welcome relief with cuts, to posing a nearly one-third upside chance.

Get rid of those high-flying tech stocks and suddenly it looks like those doomsdayers are still delivering their biggest hits. Inflation remains at the highest level.

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