Federated Hermes experts look into the latest US CPI data, inflation, and the Federal Reserve’s stance. In this sense, the body has also advanced that quantitative tightening could be brought forward, thus confirming the message of the December minutes. Meanwhile, the market has received the US CPI data well. In addition, the experts point out that the upcoming rate hikes are causing markets to turn around.
Silvia Dall’Angelo, Senior Economist at the international business of Federated Hermes
Fed officials have continued to sound hawkish over the last week, while inflation data further vindicated the recent pivot. During his confirmation hearing, Chair Powell reiterated that inflation is now deemed to be the main threat to the economic outlook and the Fed is ready to do what’s needed to keep price pressures under control.
He also suggested that quantitative tightening would start later this year, confirming the message from the Minutes of the December meeting released a week earlier. Several FOMC officials also expanded on the Minutes’ theme of “sooner or faster” tightening, with increased talk of a March lift-off and four hikes this year. They also discussed allowing the balance sheet to shrink earlier and at a faster pace than it did during the previous cycle.
Meanwhile, China seems to be on an increasingly divergent path compared to the US, with respect to both economic data and policy momentum. Inflation data released early in the week showed a more-pronounced-than-expected moderation in both consumer and producer price growth in December.
Going forward, PPI inflation is likely to moderate markedly over the year from double-digit territory currently, while CPI inflation might firm up somewhat, yet remaining well contained. That means that the PBOC will have room to ease monetary policy. That should help stabilise growth, while the country is dealing with long-term challenges – most notably the correction of the property sector – and some short-term political deadlines (the 20th Congress of the Communist party in autumn this year).
Geir Lode, Head of Global Equities at the international business of Federated Hermes
US CPI came in every bit as hot as anticipated. An incredible year-on-year consumer price increase of 7% – the highest since 1982 – received a subdued but positive reaction from investors, with equity markets gaining and treasury yields retreating. Markets in 2022 have been volatile as the reality of inflation set in, and this reaction mainly reflects relief that the print did not exceed already lofty expectations.
With interest rate rises a short-term inevitability, the market is rotating. Whether we label this a “value market” or an “anti-growth market”, the end result is the same: high-multiple, high-growth names look vulnerable. During the forthcoming earnings season, we anticipate investors showing zero tolerance for earnings misses and particularly forecast downgrades.
This transition from a growth market to a value market is unlikely to be smooth, and there will be days in which the outperformance of value stalls, or even when we see sharp reversals as tech and similar growth names bounce back strongly, but in aggregate we anticipate flows to favour the cheaper end of the market. There have been many false dawns for value investors during the last decade however the argument in value’s favour has never been stronger than now.