Is inflation peaking in Europe?

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In the latest edition of Market Week in Review, equity portfolio manager Olga Bezrokov and USI Investment Analysts associate director Chris Kyle discussed the latest inflation figures for Europe. They also unveiled the US Consumer Price Index (CPI) report in August and discussed the potential implications for markets and economies in the future.

Slowing inflation rates in the UK and France

Kyle opened the conversation by noting that inflationary pressures eased in parts of Europe in August, with Britain’s consumer price index (CPI) climbing 9.9% on an annual basis, while prices in France increased by 5.9% over the same period. Frame. Bezrokov said in both cases the gains marked a slowdown from July, when inflation rose to a clip of 10.1% in the UK and a rate of 6.1% in France, respectively.

“The UK August inflation report in particular was below market consensus for a very high reading of 10.2%,” she noted, adding that the results from both countries suggest that inflation may have peaked in Europe. Despite this positive signal, however, Bezrokov said economic sentiment indicators in the region have turned extremely pessimistic, especially in Germany, where sentiment has approached historic lows. The gloomy outlook can likely be attributed to worries about what persistently high European inflation – which has been exacerbated by the region’s energy crisis – could mean for the overall economy, she noted.

August CPI report triggers market sell-off

Turning to the US, Kyle and Bezrokov looked at the August CPI report, which sent markets selling off when it was released by the Labor Department on September 13. increase in the core CPI, which excludes prices from the more volatile energy and food sectors, Bezrokov explained.

“Rising prices for services, including housing, continued unabated in August and actually surprised on the upside,” she noted, noting that core CPI rose 0 .6% in August, against an increase of 0.4% expected. Bezrokov said 60% of CPI categories saw their prices rise last month, suggesting that US inflation is both persistent and broad-based. Core producer price index (PPI) data released the next day did little to allay concerns that inflation was taking deeper root in the economy, she added, with figures surprisingly on the rise.

Overall, recent reports helped trigger significant volatility in markets the week of September 12, Bezrokov said, noting that this is common in times of great uncertainty. “It is important to realize that markets tend to be forward-looking, which means they take into account not only what is happening now, but also expectations for the future. And right now, there is a range of potential scenarios outlining how things might play out with respect to both inflation and US Federal Reserve (Fed) policy,” Bezrokov explained, noting that each scenario has a decent probability of occurring.

Where are the risks of recession increasing the most?

Kyle and Bezrokov concluded the segment by looking at how the latest inflation numbers are likely to impact the Fed’s rate hike campaign. Bezrokov said August’s CPI report suggests the U.S. central bank should continue on its path of aggressive interest rate hikes, with most traders forecasting a third consecutive 75 basis point increase in the month. next Fed September 20-21. Meet.

Bezrokov said at the start of the summer, markets priced in the potential for a dovish pivot from the Fed – in the event of a hit to U.S. growth expectations – but with inflation continuing to soar and potentially becoming more entrenched, they recently returned to price in more hawkish Fed policy.

“It is important to note that a more aggressive US central bank increases the chances of error by the Fed, which in turn means that the odds of a US recession also increase,” Bezrokov noted. She stressed, however, that the U.S. economy is on stronger footing than in other parts of the world, such as Europe, where the continued effects of the Russian-Ukrainian war have increased recession risks.

Additionally, Bezrokov said that while recent market moves have been dramatic, she and the strategy team at Russell Investments do not currently see strong signs of panic across all asset classes. She also noted that there has been no significant increase in default rates and that, overall, price revision in the markets is normal given the high degree of uncertainty.

“Ultimately, the key takeaway here is that in times of great uncertainty, having a thoughtful strategic asset allocation in place – and sticking to it, despite behavioral biases – is probably one of the most important things. more useful than an investor can do,” concluded Bezrokov.

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Mary I. Bruner