Market remains resilient as the inflation and growth data are digested this week. Consumer Price Index (CPI), Producer Price Index (PPI) and Retails Sales are reported above consensus. The expectation of an additional 25bps rate hike in June has increased as markets are speculating longer and higher rates.
Treasury: US treasury yields jumped higher due to the strong inflation data and the hawkish stance of the Fed. Yield of treasury bills went above 5% while 10Y yield also jumped to 3.87%. More investors are intended to overweight cash due to the attractive front-end yields.
Economic Data: Although the core CPI data moderated further, other details of the report are indicating persistent inflation pressure. Retail sales jumped and the industrial production report showed signs of strength with a rebound in manufacturing.
Reopening: China reopening is raising risks to global growth and commodity prices, which is likely to add inflation pressure elsewhere and increase the difficulty for central bankers to tame inflation without a recession.
*Data as of market close. 5-day change ending on Friday.
VIEW FROM THE STREET
Goldman Sachs: Tech stocks tend to perform worse when interest rates are high as they are dependent on duration. However, the nonprofitable tech stocks still increased around 1.5% this week.
Morgan Stanley: Equity market is discounting a soft-landing situation, with growth that is high enough to prevent a recession while low enough to encourage rate cuts. Historically, such a scenario would be rare. However, the current cycle is unique due to COVID, with the unprecedented stimulus.
Credit Suisse: As stock markets are performing well at the start of the year, it is time to re-visit the valuations and relative performances. Investors are suggested to consider switching from stocks that are highly valued over the last quarter into other investments that offer more potential in the current context.
UBS: All-in yields are appealing, particularly compared to other asset classes. The demand for fixed income exposure has increased as well. We are cautious on high yield credit given the slowing US economy. For opportunities, we see potential in investment grade and emerging market credit.
Credit Suisse: The unfavorable inflation report will likely create volatility in interest rates. 10Y treasury yield surged by 40bps from its low in the middle of January. For safety, we suggest government bonds. Financial bonds are performing well as banks have reported better results driven by the net interest income, and we expect it will continue to benefit from the higher interest rates in the coming months. Corporate bond is a tempting alternative in terms of yield compared to dividend stocks.
Morgan Stanley: The economic data is delivering a mixed signal. Services are strong, keeping inflation sticky. Meanwhile, manufacturing order books are flashing a recession alert, showing the tightening effect and indicating unemployment may increase soon.
J.P. Morgan: Disinflationary wave has room to run but the progress will not be linear. Fed is likely to reverse given the weakening growth. We should take a longer term view to position portfolios for the eventual return to a low inflation slow growth economy.
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