The volatility continued last week, and when the roulette wheel stopped at the end of the week the US was down by almost 2% and the Nasdaq by a bit more than 3% along with emerging markets (mainly weighed down by China). The UK, European, Australian, and Japanese markets were all up slightly for the week, but that was as much due to them being closed for the week on Friday (while sentiment in the US soured further late in the day) as much as anything fundamental. So-called fundamentals were not really the main focus of markets in any case, especially when the much-awaited US CPI announcement came out on Thursday. Arguably this was to be the most fundamental pointer for policy makers and investors on the future path of interest rates and US GDP growth (and therefore for the prospects for the global economy). The perennial hope is that inflation will subside in ways that are positive for the economy – robust economic activity but with cooling demand for domestic services and hence easing wage inflation pressures. Instead, the number was higher than expected with accelerating domestic services inflation being offset by lower oil prices and traded good prices which instead points to stagflationary mix of higher wages and weakening demand. The market initially performed in line with the fundamental script (down a few percent) but then dramatically rallied by 5% (demonstrating intra-day volatility that we haven’t seen since the depths of the COVID Crisis in March 2020). There have been a number of explanations, but now the dust has settled the consensus seems to be that this was due to a mixture of technical factors where some investors bought aggressively ‘on the dip’, forcing other institutional investors who had hedged to cover their short positions in short order. By the next day markets had sunk again, and perhaps one positive you could take from the whole episode is that markets were left only slightly down after the negative news of the CPI data(discussed in more detail below). That might imply that a significant amount of bad news is priced into markets even if jittery investors don’t know which way to jump yet.  Another tentative ‘almost positive’ sign was that bond markets were reasonably calm (at least in the US and Australia) with 5-year yields jumping 0.3% on Thursday before stabilizing at around 4.3%. Even the beleaguered UK Gilt market settled down last week ahead of the Bank of England removing its emergency support measures (QE by another name) on Friday.

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Another fundamental factor that might have steadied the market’s nerves was the start of the US earnings season. It is early days with only a very small percentage of the market having reported but those large companies that did generally surprised on the upside, notably Pepsi, Taiwan Semiconductor (which has a US listing),United Health and some of the large US banks. Further down the market spectrum things were a bit more mixed but overall, it was as good a start as could be expected by investors. Closer to home Qantas also surprised on the upside with higher than expected ticket prices meaning that they returned to profitability earlier than expected and now expect to fulfil earlier expectations for 2023 as a whole in the just the first half of the year. It was the banks that again proved to be the mainstay and were up by around 3% last week, as net interest margins improve against what is looking like a more robust economic backdrop for Australia.

There is a great deal of focus in markets on where the ‘debt bombs’ might lie, and corporate bond spreads eased again last week but only by a small margin, and they remain down from where they were a month ago in a sign that for now, markets aren’t seeing any contagion from rapidly deleveraging UK pension funds, for instance, into the private and public debt markets.

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