Last week, the CPI (Consumer Price Index) – a measure of consumer spending, but it’s not as accurate and comprehensive as PCE (Personal Consumption Expenditures) – came out higher than expected, signaling that inflation has yet to peak in the US.
Analysts continue to expect PCE to come down to 3.5% in Q3 and 3.25% in Q4 due to a decrease in supply-chain driven inflation – especially in durable goods. However, service sector inflation is expected to remain steady at just over 4% because the labor market is strong and wage pressures are likely to remain firm for a while.
Our sense is that if these forecasts are correct, the Fed is expected to hike 50 basis points in the next two meetings, and then revert to 25 basis point hikes in September. But there is a lot of uncertainty.
The recent acceleration in monetary tightening, which is projected to continue, has had a negative effect on equities, and particularly on growth stocks, which have long been retail investor favorites. Since tech companies are prominent components of major US indexes, equity markets are likely to be choppy until there’s clarity on medium-term inflation expectations, and therefore on the path of Fed tightening.
In addition, the Russia-Ukraine war is causing an increase in the prices of wheat, fertilizer, gas, oil, and the Chinese zero-COVID policy that led to a lockdown in one of its major financial and port hubs (supply shortage). Some of the knock-on effects from the war are also still to be factored in.
Investors may feel like they have nowhere to hide, especially in this market cycle. But exposure to alternative investments can have several potential positive effects:
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