US inflation still hot, but no longer boiling

Key takeaways

The latest data suggests that US inflation is heading in the right direction, although the labour market remains stubbornly strong. Meanwhile, the UK could be on course for a somewhat surprising quarter of positive economic growth

• Headline inflation has continued to fall in the US, with March’s reading showing price rises (measured by the Consumer Price Index, or CPI) of 5% year on year. This is around half the level of March 2022, and the lowest in two years. Headline inflation includes volatile priced items like food and energy, and their falling prices were the main driver behind last month’s lower reading. Meanwhile, core inflation (which excludes food and energy) remains elevated, coming in at 5.6% year on year. This is down from last September’s peak of 6.6%, but is still a long way off the US central bank’s 2% target.

• Sticking with the US, retail spending fell by 1% in March, driven by declines in vehicle, building material and gas station sales. Consumers have been encouragingly resilient of late, but this data, along with more real-time credit card transaction data, indicates that the tide could be turning on consumer spending. While this sounds like bad news, it’s theoretically part of the US central bank’s plan to slow economic activity (through higher interest rates), thereby reining in inflation. The sooner inflation is brought to heel, the sooner the central bank can consider stepping back from interest rate rises.

• Across the Atlantic in the UK, the latest data showed flat economic growth in Feb 2023, slightly below expectations. However, combined with an upward revision to January’s data (+0.4%), there are hopes that the first quarter of 2023 could represent positive economic growth for the UK. Analysts continue to expect some negative economic growth readings ahead for the UK and other developed economies, as a result of interest rate hikes and other restrictive central bank policies. However, our best guess is for a period of stalling economic growth, rather than a sharp economic downturn.

• Turning to business news, the quarterly corporate earnings season continues, with large US-listed businesses reporting on their earnings for the previous three months and providing updates on their outlook for the period ahead. As usual, large US banks kicked off proceedings, with JPMorgan, Citi and Wells Fargo reporting results on Friday. All three banks beat investor expectations, declaring solid earnings and net income growth. Markets rewarded the positive results, with all three companies’ share prices rising. Despite this upbeat opening act, it’s worth noting that guidance from companies on earnings over the first quarter of 2023 has been poor overall.

Market moves

• In a generally good week for most riskier asset types, share prices across major markets enjoyed a positive run of performance.

• Amid this pro-risk market mood, prices in bond markets largely fell. The yields paid on bonds (which move in the opposite direction to bond prices) rose accordingly.

What to look out for this week