“We expect March CPI headline inflation to be extraordinarily elevated due to Putin’s price hike”. This was a quote from White House Press Secretary Jen Psaki as she delivered the White House Briefing on Monday evening.
Given the White House’s signposting of elevated inflation, all eyes were on Tuesday’s US inflation data, and this didn’t disappoint, coming in at a fresh 40-year high at 8.5%. The figure was boosted by gasoline prices, which have risen 18.3% in the space of a single month. One notable turnaround in the data was the fall in prices of used cars and trucks, which fell 3.8% on a month-on-month basis. This could be an early sign that consumers are starting to feel the pinch of higher costs and have cut back spending on some high-ticket items. The reaction in bond markets will have no doubt caused confusion for many, as bond yields actually fell on the news of higher than expected inflation.
UK inflation was reported at 7% on Wednesday, a 30 year high, highlighting elevated inflation is a global phenomenon currently. Economic commentators have warned that inflation is likely to head higher in the spring, before starting to level off later in 2022. With the Bank of England Monetary Policy Committee meeting at the start of May, there could be further interest rate rises in an attempt to stifle inflation. The UK jobs market remained buoyant, with unemployment dropping to pre-pandemic levels of 3.8%. Wage growth came in at 5.4%, and while this is higher than in recent years, it is still below current inflation levels.
US earnings season kicked off this week, with JP Morgan reporting on Wednesday. The lacklustre results led to the banking sector falling, with CEO Jamie Dimon appearing cautious on the outlook, driven by concerns around interest rate rises and the Russian invasion of Ukraine. There has been a slow-up in dealmaking and Initial Public Offerings (IPOs) for the bank, as companies are holding back while volatility is high. Despite the banking sector falling, the US market rose strongly on Wednesday, driven by the technology sector.
Infrastructure assets are seen as attractive investments in an inflationary environment. This was highlighted with a bid for Italian airport and motorway operator Atlantia, in what would potentially be the second largest M&A deal of the year. The bidders, Blackstone and the Benetton family, will take the company private if successful, and highlights the ability of private markets to complete extremely large deals. Further M&A news broke on Thursday, with Elon Musk making an offer to Twitter, valuing the company at $43billion, an 18% premium to Wednesday’s closing price.
The European Central Bank (ECB) meeting provided few surprises, with the ECB continuing with their reduction in bond purchases, which will likely end in Q3 2022. Interest rates were held, and are unlikely to rise in the near term, despite high inflation prints across Europe. The ECB is mindful of the impact of the Russian War on economic growth and wants to be flexible in their approach.
Peace talks between Russia and Ukraine have made very little progress, with Putin stating talks were at a “dead end”. On the back of the news, oil prices rose, moving through $100 a barrel once more with an increased likelihood of a prolonged war and escalating Western sanctions.
Given the uncertain economic backdrop currently, we think it makes sense to hold a range of different asset classes across a range of different geographies. We also think a willingness to be flexible in one’s investment approach is key – as John Maynard Keynes famously said “When the facts change, I change my mind – what do you do, sir?”
Andy Triggs | Head of Investments, Raymond James, Barbican
Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.