Prices what prices

The notion that US inflation rates were on a steadily downward trend back to the Fed’s 2% target took a knock-on Tuesday as the core rate remained unchanged when a further drop was expected, and although the headline rate fell, it fell less than expected. That put a dent in bond markets and pushed the US dollar higher, and as a result, equity markets took a knock. But one would suggest not a serious one. UK gilt prices were likewise dented by some fairly strong wage data ahead of this morning’s UK inflation report, which reported that UK inflation held steady at 4%, actually no better than last month but no worse than expected. The Bank of England will take little solace in an economy that is expected to shrink in the last quarter and inflation running at twice the target rate. Rock and a hard place come to mind.

Unsurprisingly, the monthly Merrill Lynch fund manager survey reinforced all those preconceived ideas where we thought the investor mindset was present. Heavily tech-exposed, confident of a soft landing in the US, low on cash, sentiment remaining optimistic, ahead of yesterday anyway, higher than it has been in the past but more than it has been for the past couple of years. Those who were getting more and more optimistic that US interest rates were soon to be cut by the Fed, possibly next month, despite the protests of Mr Powell et al, are starting to unwind those expectations back to June. He really will want to see the economy weaken before making his move.

An interesting report received this morning from S&P Global highlighting output prices derived from the Purchasing Manager Surveys produce a fairly healthy lead indicator for where inflation rates are heading. To prove the point, output prices started to fall globally in late 2022 and continued to do so through 2023. For what it is worth, according to S&P Global, at least, inflation rates have now caught up with that fall in output prices, suggesting exactly that inflation rates may, at present, at least struggle to fall further from here without output prices falling further. If anything, with a modest rise in some input costs, such as freight and energy, there has even been a slight uptick in output costs.

Lastly, those who think trading tech stocks is a one-way bet would have had their wings well clipped over the [past couple of days. ARM holdings jumped 25% on the news of the results and then ruing that they did not own them will get the chance again. The stock lost all three days of gains in one day yesterday, ouch.