March 12, 2024
The latest inflation data on the US economy has just been released. Headline inflation is up, from 3.1% to 3.2% as shown with the fluo-green line in the chart above, confirming fears that the US economy, performing very well, could be heating up again. The good news is that US core inflation, or the basket of less volatile components as highlighted by the blue area above, is down from 3.9% to 3.8%. Read full commentary on inflation components here.
Stock markets reacted positively to the news, as higher inflation is tangible evidence of sustained consumer demand and economic growth. Bond markets very less happy about the news, with yields rising as we can see below with the US 10 year yield, pricing a higher probability of later rate cuts in the US.
As we can see below, yields in key European and US government bonds have risen across maturities YTD, confirming that staying short duration has been so far the correct market strategy. We confirm that we would continue to prefer short duration instruments until we see clear and tangible signs of fading inflation, alongside a soft landing of the US economy.
Last week the US stock market has seen on of the biggest tech outflows in history, probably due to NVIDIA being considered the hottest stock right now and changing hands at record pace. Uncertainty towards inflation in the medium term, the reaction to the current economic context by the Fed and other central banks and cuts postponed and back-loaded to 2025 have made the S&P 500 more volatile than what observed in recent times.
It is interesting to spot that defensive sectors have attracted more attention than cyclicals in the very last few days.
US inflation has surprised to the upside, affecting longer duration US government bonds (better to keep short duration until some signs of inflation and growth weakness will emerge). Volatile stock markets seem to have pushed investors to take a renewed look to defensive sectors and low vol factors.
