The IMF remain gloomy, that’s the good news

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A modest little run in US equities came to a halt on Thursday as the latest Consumer Price Inflation index came in kind of where it was expected to. Prices grew year over year by 3.7% against an expected 3.6%. This followed Wednesday’s Producer Price Index which reported input prices rose again by slightly more than forecast. Although either was not particularly far from the mark I guess the question is does this all add up to the Fed’s fear pricing pressures will remain higher for longer? The bond market moved little at the shorter end, suggesting that these combined reports do not change the outlook for the Fed at next month’s rate-setting meeting. At present the market does not anticipate another rate rise, however a renewed selloff in longer-dated maturities once again puts pressure on equity valuations, hence the reversal in the recent rally in stock prices. We also had the release of the minutes from last month’s FOMC meeting, in which members retained the consensus view that rates will need to stay higher for longer to combat the threat of a resurgence of a second wave of price increases.

Today earnings season starts for the second quarter of 2023, starting with the large-cap banks, JP Morgan, Blackrock, United Health, and Citi are the headline acts. Jami Dimon’s comments on the economic outlook are always headline makers, but recently his generally depressed view on life has yet to be entirely realised. It will be interesting to see if the general improvement in the economic outlook for the US economy has raised his spirits at all. Equity analysts are always slow to react to changes in the macro environment, for the first time in four quarters analysts’ earnings growth turned positive year over year. On the macro front today we get the latest Michigan Consumer sentiment survey and inflation expectations.

The Fred 5 year five inflation expectations have been creeping higher most of the year and now stand around 2.5%, however no higher than it was in mid-August. There appears some correlation between 5-year inflation expectations and US ten-year treasury yields, strangely more so than with the ten-year inflation expectations. Anyway, if that is the case that would suggest there may be room for 10-year yields to fall further in the coming months.

The IMF are in the middle of their annual meeting and the start was dominated by the release of their forecasts for the global economy and the assessment from the Managing Director of the current economic conditions. Their outlook for the global economy is sluggish growth, global inflation rates falling but remaining above central 2% targets in the coming year and a world in which economic shocks are becoming more the norm.  The IMF have a rotten track record of predicting economic outcomes and it’s probable this will be the case again.