US inflation figures were the key data point to be released overnight, with annualized CPI coming in at 7.9%, the highest reading in over 40 years.
What started as supply constraints and loose monetary policy in response to the Covid-19 pandemic has been exacerbated by the recent military conflict between Russian and Ukraine, which has seen commodity prices surge. The continual high rate of inflation will put the Federal Reserve in a tough position regarding their policy on official interest rates. On the one hand, rates should rise to combat rising price levels, however, higher rates will also curb economic growth. With the Russian and Ukrainian conflict now stretching into its third week, and no diplomatic resolution in sight, uncertainty remains high. Given the severity of economic sanctions placed on Russia by Western countries, and the Russian government’s response by stopping the export of many major commodities, the size of the impact on global growth is unlikely to be fully recognized for some months.
Bond yields rose sharply on Thursday in response to the higher inflation figures, with the yield on the US 10-year note trading back above 2%, while the yield on the 2-year note closed at 1.70%, the highest since November 2019. The prices of notes and bonds, which move inversely to yields, are clearly pricing in higher levels of inflation and the inevitable increases in official rates that will come over the next 12 months. The chart below plots the yield on the US 2 year note as well as the Fed Funds rate, over the past two decades, with the sizable gap between the two clearly shown.
*Note: These prices are based on futures and/or CFD pricing and may therefore differ slightly from spot pricing
US equity prices parred early losses, recovering to close near the highs of the session. By the close, the S&P500, was down 18 points, or 0.43%, with energy and consumer discretionary stocks leading the way, up at the sector level by 3.07% and 1.16% respectively. The Nasdaq100 was a little weaker than the more diversified indices, closing 1.10% down at 13,591. CrowdStrike (CRWD) and Amazon (AMZN) were the top-performing Nasdaq stocks, gaining 12.5% and 5.4% respectively. CRWD, which is a cybersecurity company released better than expected 4th quarter earnings, with many Wall Street analyst upping their share price targets to the US$250 to US$275 range. The stock closed at US$191.02. Amazon on the other benefited from the announcement that the company plans on a 1 for 20 stock split combined with a US$10 billion share-repurchase program. The share split will result in the company’s share price returning to around the US$150 level, which has the potential to increase the appeal of the stock to retail investors. Historically, data from BofA Global Research has shown that for companies that enact share splits, their share price returns a year after average 25%, compared to just 9% for the overall market.
To commodity prices, crude oil retreated, with the WTI futures prices trading back to US$106.35 a barrel (-2.24%), down from a peak of US$130.50 earlier in the weak. On the London Metals Exchange (LME), both aluminum (-4.49%) and copper (-2.03%) prices were weaker. Spot Gold prices firmed slightly, oscillating around the US$2000 an oz level, while iron ore prices lifted over 4%.
ASX SPI200 futures prices were weaker overnight, declining 49 points, to close at 7,084, suggesting a slightly weaker start to our trading day, while the Australian dollar is currently buying 73.56 US cents.
This article was written by James Woods, Portfolio Manager, Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3632.
