Is US inflation showing signs of moderating? November saw dissonance between market and Fed US interest rate expectations, the crash of FTX cryptocurrency, and rising Covid levels in China. According to Jeremy Richardson, these short-term macroeconomic developments should not be overlooked.
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Hello, this is Jeremy Richardson from the RBC Global Equity Team here with another update. Now, as you can tell, I wear glasses. In fact, I've got two pairs of glasses, one for seeing the distance and one for closer. And it feels as though that as an investor, I would probably want glasses that help me in the near distance rather than the far distance given developments so far this month.
And, in particular, the news that we had out of the US about inflation which came in 20 basis points cooler than the market had been expecting. Now this is good news, I think, for investors and for capital markets generally. You remember this big debate we've been having for much of 2022 really around the debate, this tension between inflation and the level of interest rates that would be necessary in order to tame that. If US inflation is showing signs of actually moderating, and this is now confirmed, then it may indicate that we will only have to contend with a lower rate of future interest rates. And I think that kind of got the markets a little bit more excited so far in November.
And, in particular, the news that we had out of the US about inflation which came in 20 basis points cooler than the market had been expecting. Now this is good news, I think, for investors and for capital markets generally. You remember this big debate we've been having for much of 2022 really around the debate, this tension between inflation and the level of interest rates that would be necessary in order to tame that. If US inflation is showing signs of actually moderating, and this is now confirmed, then it may indicate that we will only have to contend with a lower rate of future interest rates. And I think that kind of got the markets a little bit more excited so far in November.
So why do I need glasses, to look at the near term rather than the distance? Well, if you think about the longer term looking into the distance, it becomes clearer that actually with every passing day, we're getting closer to the point at which the Fed can hang up its calculator and say the job is done. However, this dissonance, this tone, the difference between what the market's expecting in terms of perhaps a cooler pace of interest rate increases in the short term, versus the still quite hawkish language you're getting from the Fed, is slightly to still cause choppiness within markets in the short term.
On top of that, we've had two other developing stories this month which have been occupying investors’ minds. The first one is around FTX and what we've been seeing in crypto. Now FTX, a well-renowned trading platform, has gone into bankruptcy amidst all sorts of allegations about how it's conducting its business. I think for equity investors, we can perhaps be somewhat thankful that the integration of cryptocurrencies into mainstream equities has so far remained very, very modest, and so the backwash from this is likely to be relatively small, although anything that dents sentiment is probably to be regretted.
The final thing I just wanted to mention though, and perhaps more relevantly in terms of the future, is what we've been seeing in China and in particular the wave of Covid which seems to be rivalling China's previous experiences earlier in the spring. From the beginning of the month, we went from about 4,000 cases of coronavirus in mainland China to just under 30,000 in pretty quick order, and we're beginning now to see a return to more extensive lockdowns. Now, this has had mixed impacts, I would say, for equity markets because obviously, in the short term, there is some potential disruption, economically and putting the public health issues to one side if may. But economically, it will inevitably have some short-term impacts.
In the longer term, though, it does maybe indicate another step along the way moving from pandemic towards endemic. And there's certainly a school of thought that says that the more that China experiences first-hand the effects of the coronavirus, the more prepared it will be to eventually announce a change in strategy and one which moves away from zero Covid towards managing Covid, and I think that would go a long way to reducing the levels of risk and anxiety for the populace and also for investors. In the short term though, and hence I still need those glasses for the near-term, is the risk that this disruption could impact potentially supply chains globally, and that has the potential to perhaps make the Fed's job a little bit harder because it could potentially be somewhat inflationary. I hope that's been of interest and I look forward to catching up with you again soon.