Stronger than expected inflation and spending data have pushed up U.S. interest rates and interest rate expectations with negative impact on equity markets and a stronger U.S. dollar.
- The unexpectedly strong increase in core PCE inflation in January – up 4.7% vs 4.6% in December – means the Fed may be leaving the fed funds rate higher for longer.
- U.S. equity markets sold off during the last week, with the S&P 500 down 2.7% leaving it up 3.4% for the year to date.
- The bright spot in the inflation numbers is that 2nd half of the year should see sharp falls in shelter inflation – the largest single segment in the CPI — as the already observed fall in rents finally make it into the CPI data.
- Also, higher market interest rates and a sell-off in U.S. equity markets likely will relieve the Fed of beginning a more aggressive move in interest rates.
- Financial markets currently are expecting three more ¼% increases ending with the fed funds rate at 5.3%, with little chance of rate cuts later in the year.
- The new income and spending data out this past week indicate that 2023 first quarter U.S. real GDP growth will be close to 1.5%.
In China, which is likely an important growth engine for the global economy, the turnaround in China government policies is already generating improved government liquidity provisions.
- China’s central bank has promised to implement a “targeted and forceful” monetary policy to support domestic demand.
- Home sales in Beijing are running at nearly double the rate of late 2022.
- China’s new earnings season is showing strong results from the leading tech companies.
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