Why US inflation may have peaked

In March, consumer prices in the United States emerged up 8.5% year on year. This is the highest rate since 1981.


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It also seems that the upward pressure on prices is spreading. The Cleveland Federal Reserve’s trimmed-average inflation barometer, which abstracts from price changes at both ends, crossed the 6% threshold for the first time since this series began, nearly a year ago. forty years old.

For its part, the consumer price index (CPI) “sticky prices” of the Federal Reserve of Atlanta (which is based on a basket of goods whose prices are quite rigid) reached its highest level in thirty years. .

Rising interest rates: a brake on growth

The release of these figures was accompanied by new incisive statements from the US Federal Reserve (Fed). The president of its Saint-Louis branch, James Bullard, said it was fanciful to imagine that inflation could be brought down to acceptable dimensions without raising policy rates to levels that would dampen economic growth. . Governor Christopher Waller noted that raising interest rates to curb inflation is like a sledgehammer that will cause some collateral damage.

On April 19, the yield on ten-year US Treasuries rose to 2.90%. Now, markets are pricing in a 98% chance of a 50 basis point Fed rate hike in May. However, a closer look at the numbers reveals that inflation is beginning to decline. Explanations.

Price pressure easing

There are signs that pandemic-induced price distortions are starting to ease and that prices for some goods are even coming down. In March, the CPI, excluding energy and food, emerged up 0.3% month on month, the weakest increase since September.

Prices of essential goods, which had soared due to a sharp rise in demand during the pandemic, fell (-0.6%) for the first time since February 2021. Used car prices, which increased enormously since the start of the health crisis, fell by 3.8% month on month. And there are also price drops for some electronic goods, including televisions and smartphones.

In recent months, household consumption has shifted away from durable goods and some bottlenecks on the supply side are easing. As a result, the upward pressure on the prices of essential goods is easing.

The assumption of persistent high inflation remains a major risk for investors, which is likely to force the Fed to accelerate the tightening of its monetary policy to the detriment of consumer purchasing power.

Inflation figures in the services sector are less encouraging. But this inflation stems in part from an increase in airline fares of 10.7% month on month, a reflection of rising fuel prices.

The slowdown in inflation

Inflation is also expected to slow due to base effects. The recent rise in oil prices should subside. UBS Research expects a barrel of Brent at 115 dollars at the end of the year (against 112 dollars currently). Barring another spike in energy prices, year-on-year comparisons should translate into a decline in inflation in the coming months.

More generally, investors should remember that recent figures compare a normal economy to one crippled by the pandemic. In April, the figures will compare a normal economy to one in the process of deconfinement and in which prices had already started to rise. This summer, they should compare a normal economy to a relatively normal economy in 2021. Inflation numbers should then become less of a concern.

Wages are not inflationary

So far, rapid wage increases have been accompanied by productivity gains, which tempers the inflationary impact of more generous compensation. The Atlanta Federal Reserve wage barometer shows a 6% increase in March (three-month moving average), the highest rate since the creation of this statistical series.

However, wages are inflationary only if they are not accompanied by productivity gains. But the latter is increasing. Thus, the 0.9% annual increase in unit labor costs in the United States in the fourth quarter is in line with that observed over the past two decades.

A plausible decline in inflation

The assumption of persistent high inflation remains a major risk for investors, which is likely to force the Fed to accelerate the tightening of its monetary policy to the detriment of consumer purchasing power.

Despite this risk, there are encouraging signs that suggest a decline in inflation until the end of the year. In UBS’s baseline scenario, this would allow central banks to slow the pace of monetary tightening and temper their rhetoric. The risk of a hard landing for the economy would be reduced.

Moreover, despite the erosion of purchasing power linked to inflation, its impact on households is mitigated by the reduction in monthly mortgage loan payments. Indeed, many property owners have been able, in recent years, to renegotiate their loan at advantageous rates.

Government-sponsored hackers are skilled and difficult to neutralize. Recent incidents have shown that they have new tools to carry out sophisticated attacks.

If the pace of the fall in inflation is uncertain, the economy can still escape recession. Against this backdrop, while UBS Research remains neutral on equities overall and still finds undervalued stocks, especially those exposed to long-term themes such as 5G, smart mobility, as well as than automation.

So what are the key messages? Overview.

1. US earnings should hold up well

Equity markets are being hurt by rising bond yields, which are reducing the attractiveness of equities relative to bonds. The yield on ten-year US Treasuries, which stood at 2.39% in early April, is now hovering around 2.90%. The sustainability of earnings growth in the United States is increasingly important.

As the first quarter earnings season kicks off in the United States, companies are facing several challenges, such as high inflation in the country and war-inspired concerns in Ukraine, as well as continued lockdowns in China.

Despite everything, UBS Research still expects solid earnings growth of around 10%, thanks to the good performance of the American economy. The latter remains in good health and is less vulnerable than the European economy to the repercussions of the war in Ukraine.

Unlike Europe, which is highly dependent on Russian energy, the United States is a net exporter of oil and gas. In addition, a slowdown in Europe is not expected to dampen earnings growth in the US as S&P 500 companies generate only 14% of their revenue in Europe.

Household consumption should support strong sales growth despite the erosion of excess savings during the pandemic, especially as job creation and wage increases are on the agenda. Wage growth of 6% in March (three-month moving average) is cause for concern for the Fed. But, for companies that cater to consumers, it bodes well. Finally, when the ISM manufacturing index is above 55, profits are revised upwards in 85% of cases. However, this index currently stands at 57.1.

Bottom line: Earnings per share growth of 10% this year and 7% next year can be expected for S&P 500 companies. year, compared to 4390 today.

2. The numerous cyberattacks highlight the importance of security expenditures

The recent wave of computer hacking highlights the risks that weigh on States, on companies, as well as on individuals. The FBI claims to have thwarted an attack orchestrated by Russian military intelligence. Microsoft said it had neutralized sites used by a group of computer hackers close to the Kremlin which attacked American, European and Ukrainian entities. According to Bloomberg, at least seven Indian power grid control centers have been infiltrated by hackers from the Chinese intelligence services.

This upsurge in attacks demonstrates the need to invest in cybersecurity. Government-sponsored hackers are skilled and difficult to neutralize. Recent incidents have shown that they have new tools to carry out sophisticated attacks.

In addition, the US government has already revised upwards the appropriations allocated to civil cybersecurity in 2023 (10.9 billion dollars, or 11% more over one year, including 2.5 billion dollars for the Agence de cybersecurity and infrastructure security (CISA).

Bottom line: Cybersecurity stocks continue to be reasonably valued, with enterprise value to revenue ratios close to their five-year average. Cybersecurity, as well as artificial intelligence and big data are part of the theme of entering the era of security.

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