In the first month of 2023, the main asset classes did remarkably well, with global equities markets rising by 7%, the largest since January 1988. Due to China's re-opening measures and lower-than-anticipated inflation rates, investors forecast a soft landing for the global economy. In the coming months, however, we suggest that investors should maintain a large cash position. Client may invest in short-tenor cash alternatives to generate yield and prepare for a change in market direction in the second quarter of 2023.

 

Since the most recent figures of the January’s personal consumption expenditures price index (PCE) released on Friday, 24 February had exceeded market expectations by registering a substantial monthly increase, we feel and emphasise that inflation is difficult to diminish.

 

The PCE increased by 5.4% on an annual basis, which was 0.4% higher than market expectations. It was also higher than the PCE for December (5.3%) and reproduced the upward trend. The Core PCE index, excluding food and energy prices, had also increased from 4.6% to 4.7%. This indicates that the situation of easing inflation is not as positive as the market had previously assumed. In addition, the rate of decline is slower than predicted by the market.

 

It is hard to ignore the phenomenon reflected by other inflation indicators in addition to this number. Including the previously announced production price index (PPI), the overall and core statistics continued to reach 6% and 5.4%, respectively, greatly exceeding market expectations of 5.4% and 4.8%. While continuing to decline, the consumer price index remained elevated at 6.4%, well over the Fed's target rate of 2%.

 

Although while the energy price has declined sharply from last year's high of USD 130 to USD 75, as one of the causes of severe inflation, investors should not overlook the fact that wages, rents, and prices for used automobiles remain high. The rise of inflation warrants investors' prudence.

The core index, which is regarded as an inflation indicator, remains well above the Fed's 2% inflation target level, despite the dramatic decline in energy costs and the overall lowering of CPI, PPI, and PCE.

 

Inflation's decreasing trend quickly reversed, and there were even prospects of resurgence. Under the restrictions of the economy, central bank authorities are unable to aggressively raise interest rates, despite being aware that the inflation is difficult to control.

 

As you may be aware, the United States' overall debt has reached USD 32 trillion, and the continued increase in interest rates will only exacerbate the debt burden.

 

Secondly, the high interest rate has a substantial impact on individuals conducting business as well as on the lives of citizens who are struggling with inflation. In addition, there will be a presidential election in the United States, so the relevant authorities have no alternative but to temporarily reduce inflation in order to create the illusion of dropping prices and stabilise investor confidence.

In conclusion, the central banks will continue to maintain a hawkish position, proving that inflation is difficult to control.

 

How should you position your portfolio in view of the situation? Speak to your dedicated WRISE Client Advisor now or connect with us at www.wrise.com

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