In Focus: US Inflation,Hunt’s Budget and Equities

US Inflation in Focus

Yesterday, data from the States indicated that headline inflation continued to ease over February while core inflation rose marginally. Headline CPI fell 0.4 percentage points from last month’s print to 6%, in line with expectations. This came as the rate of food price inflation eased to 9.5% from 10.1% while oil price inflation also slumped from 27.7% last month to 9.2%. Nevertheless, it is estimated that 70% of the increase in headline inflation came from housing-related cost pressures which have risen sharply due to rising rates. Meanwhile core inflation came in marginally above expectations at 0.5% on a month-on-month basis, a rise from the previous print of 0.4%. This is indicative of how inflation may be embedding itself into the US economy as it persists to remain well above the Fed’s target rate of 2%. However, as the FT writes “officials have said they are looking past this, however, because the so-called “shelter” metric tends to lag real-time data by several months. Home prices have begun to cool nationally, and rents have eased, suggesting this component of the inflation report will reverse soon.” As such, assuming house costs were stripped out, core prices rose 0.4% in February (in line with January’s print), hence explaining some of the muted reaction.

Yesterday’s CPI print comes as markets recalibrate their expectations of the Fed’s rate hike decision on 22nd March. Indeed, over the last week expectations that the Fed may potentially raise rates by 50bpts following Chairman Powell hawkish testimony before the Senate Banking Committee were downwardly revised given SVB’s collapse and concerns over the implications of further monetary tightening on the banking sector. Hence, as markets continue to keep one eye on the health of the banking sector and banks’ exposure to Held-to-Maturity bonds, the other will be firmly kept on the Fed’s interest rate decision next week.

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Hunt to Deliver Budget

At 12:30 today, all eyes will be on the House of Commons as Jeremy Hunt announces his Budget. Here, the Chancellor is poised to bring the energy price cap, childcare and pensions into focus. With the not-too-distant memory of Kwarteng and Truss’ mini budget fiasco no doubt remaining on the back of his mind, Hunt will be keen to deliver a budget which doesn’t jolt the market.

Regarding energy, It is widely expected that the chancellor may keep the Energy Price Cap in place for a further three months. Presently, the price cap for a typical household is set to rise from ￡2,500 a year to ￡3,000 on 1st April. This comes as falls in the wholesale cost of energy mean that the amount spent by the government for such support has reduced significantly.

Concerning Childcare, it is expected that the chancellor may announce a raising of the current ￡646-a-month per child cap on support for universal credit claimants. This is a move which will try to bring people back into the work force and fill shortages which continue to hamper on the UK economy’s productive potential. Indeed, while job vacancies fell by 55,000 in the most recent print, the UK remains close to historically low levels of unemployment and historically high levels of job vacancies.

On the topic of pensions, Hunt is expected to increase the lifetime allowance from ￡1.07m to potentially a level around ￡1.8m which if enacted, this could see millions of pensioners’ tax burdens decrease. Though, there is speculation over whether Hunt may increase the age of state pension limit, which currently allows people to begin drawing from their state pensions when they turn 66. The government have already announced that they intend to bring this up to 67 by the middle of the next decade, while also raising it to 68 by around 2045.?

This budget comes as the government tries to restore credibility ahead of the next general election, which is to be held no later than 25 January 2025, following a year which saw the departure of two PMs, along with 145 other government resignations and sackings. This of course comes as the cost-of-living crisis continuing to be one of the most salient political issues for the electorate, and hence all eyes will be on Westminster early this afternoon.

Equities Update

Yesterday saw equities come up for some air as markets digested inflation data broadly coming in line with expectations while concerns also eased around the implications of SVB’s collapse. As such, the S&P 500 ended yesterday 1.68% higher while the tech heavy Nasdaq also gained 2.14%. Elsewhere, the Dow Jones closed over 1% higher. Across the Atlantic, the pan European STOXX closed 1.53% higher, marking their largest one-day gain since December after four consecutive closes in the red. More globally, the MSCI All-World index rose 0.84%.?