Market Pulse - The week in review

THIS WEEK’S RECAP:

 

▪ The decline in US inflation continued last month, although it did so at a slightly less rapid rate than anticipated. The Consumer Price Index (CPI) on an annualized basis dropped by 0.3 to 6.2%. The cost of shelter has remained stubbornly high but is anticipated to decrease in the upcoming months.

 

▪ Despite initial expectations, various economic indicators, such as US Retail Sales for January, have revealed more robust economic activity than anticipated at the outset of 2023. This unexpected economic strength is causing adjustments in cross-asset prices. Equities have sustained their gains from January, aided in part by a relatively strong earnings season, while bond yields have increased. The higher bond yields reflect the possibility that short-term interest rates may remain elevated for an extended period. That view was supported by recent hawkish remarks from several Federal Reserve speakers.

 

▪ As we have highlighted previously, this combination of declining inflation and relatively robust economic activity could potentially be the ideal scenario for markets. The challenge is that it is a relatively narrow path, as a resilient economy is likely going to slow down the fall of inflation. We believe this is what explains the market’s hesitancy to take the combined recent economic news positively.

 

▪ Finally, the Japanese government's unexpected nomination of Kazuo Ueda for Governor of the Bank of Japan (BoJ) rather than selecting an existing Deputy Governor as the successor has caught our attention. This move could indicate a departure from the BoJ’s ultra-accommodative policies. If the Bank of Japan were to abandon its current framework, it could have far-reaching repercussions for global asset classes, particularly in the areas of global bonds and credit; Japanese institutional investors, who are significant lenders in these markets, may eventually be enticed to bring some assets back to Japan.

 

ON DECK FOR NEXT WEEK:

 

▪ In a holiday-shortened week, there are scheduled releases of Canadian CPI (Feb. 21) as well as monthly business sentiment indicators from multiple countries.