2023

On inflation again and on why it is so difficult to think of it as moving in a unique direction or as a simple monetary issue. —

As some of you know, I’ve been skeptical of the possibility that inflation would soon return to where it was before COVID. My idea was that the historical long-term averages (broadly 2-4% per year) would eventually prevail. Two events now could force me to change my mind, at least temporarily.

Even on a hot summer day you have to wonder whether we will ever go back to working in an office as we did before, air-conditioning and all. Builders are getting the message.

Recent nervousness in the bond market and oscillating monetary policy expectations are beginning to bother equities. How long-lasting this effect will be is anyone’s guess; but while the focus is on earnings and especially quarterly results, it is useful to ponder what a more restrictive fiscal policy may mean for the direction of stock prices (see cover graph).

Despite another expected rise in official rates (in the Eurozone), equities outperformed bonds last week, maybe because investors think (or hope) that every successive tightening brings us closer to the end of the monetary cycle.

Economic news was mixed last week, with China growing below expectations and inflation moderating. Markets continued to have a good run, especially equities.

The last three weeks have continued to be friendly to equities and somewhat hostile to bonds.

A turbulent week for equities and a relaxing one for bonds. Strange then that all the fuss was centered on inflationary news and how these would impact upcoming monetary policies.

The stock market has decided that central banks are close to the end of the tightening cycle. I think that is certainly true in relation to, say, 6 months ago, but I remain cautious because there are indications that further tightening may come and continue for longer than we would like.

Emerging market equities were the star of the group this week (+1.3% in Euro terms), reflecting perhaps a renewed enthusiasm for global growth prospects. Otherwise most of the non-financial news ranged between the hopeful (Trump’s indictment) and the horrific (Russian attacks on flood victims).