Head of Macroeconomic Research
Summary: Inflation in the United States is running hot. Both the CPI and the PPI report for January are above expectations. There is no sign that inflation is slowing down or that it has approached its peak. On the contrary, it is now strong and broad-based. The U.S. Federal Reserve has certainly been too complacent regarding the inflation dynamics. Expect the central bank to act aggressively at the upcoming March FOMC meeting (consensus : 50bp interest rate hike).
· The U.S. Producer Price Index (PPI) for final demand rose by 1.0 % in January. This is a strong acceleration following an increase of 0.9 % in November and 0.4 % in December 2021. On a year-over-year basis, final demand prices jumped by 9.7 %. This is uncomfortably high.
· Core PPI (excludes food, energy and trade services) for final demand rose by 0.9 % in January. This is the largest increase since January 2021 (1.0 %). On a year-over-year basis, core PPI is up by 6.9 %.
· Pipeline inflationary pressures are building. Higher commodity prices, global trade disruptions and increases in key inputs to production are pushing overall prices higher. This is the clear signal that inflation is not transitory but structural in the United States, in our view. In these circumstances, the U.S. Federal Reserve will have no other option but to respond aggressively at the next FOMC meeting in March. This implies that a 50bp interest rate hike is likely.
The personal consumption component of the PPI – a proxy for the Consumer Price Index (CPI) – is up by 0.7 % month-over-month after 0.5 % in December 2021. This suggests the headline CPI for February is likely to remain elevated and that inflationary pressures will not decrease. We don’t exclude that headline CPI could reach 8 % in February or in March. The release of the first estimate of the February CPI is scheduled for 10 March.
Pipeline inflationary pressures are high. Inflation for processed goods rose 1.7 % MoM, inflation for services used as inputs to production moved up 0.3% MoM and inflation for unprocessed foods excluding energy was up 0.1% MoM. Inflationary pressures will remain a headache for much longer than initially expected.
The underlying inflation trend appears to be around 8% - the three-month annualized change in core PPI jumped to 8.2 % versus prior 7.8 %. This is unprecedented in recent history.
Inflation is broad-based : services +0.7 % month-over-month, goods +1,3% month-over-month, energy +2,5 % and food +1,6 %. There are strong increases in hospital outpatient care, apparel, jewelry, travel accommodation, truck transport, autos, diesel, beef/veal, dairy, jet fuel etc. U.S. Inflation is now structural.
We see two options to fight inflation : tightened monetary policy (on the way) and removal of tariffs barriers, notably those implemented under the Trump administration (this is rarely mentioned).
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
