Weekly Investment Update (04/12/2024)

This week, markets were again forced to digest several inflation-related data points. Early in the week, the Consumer Price Index (CPI) came in hotter than expected even as data related to producer prices was more encouraging relative to a further easing of inflation pressure. This somewhat mixed picture has led to a pause in equity market gains, which is not surprising given that the first quarter saw a rapid rise in stocks.

Although the market continues to push out expectations for the first rate cut, we believe the timing is not critical for equity markets. With earnings season beginning, the growth side of the ledger continues to look strong, with earnings expectations for 2024 and 2025 holding steady at 10.5% and 13.0%, respectively. In our view, although volatility is likely, equity markets rarely endure prolonged downtrends with earnings expectations so strong.

Disinflation Process Continues to Be Bumpy

What is happening: U.S. headline inflation accelerated slightly to 3.5% in March from 3.4% in February on an annual basis, while core inflation held steady at 3.8% year-over-year, with both inflation metrics exceeding expectations. As we have noted in recent publications, the last mile of disinflation is typically the most challenging: The last four year-over-year headline inflation prints exceeded expectations. Shelter costs continue to be an obstacle in the battle against disinflation, with shelter and gasoline prices contributing to more than half of the increase in headline CPI for the month. Core services excluding shelter remained firm, with segments such as airfares increasing, which can often be influenced by higher oil prices. Core goods prices continued their deflation trend.

Why it matters: Although disinflation momentum has slowed, the underlying components remain consistent with prior months. Notably, despite an increase in headline inflation since the start of the year, a third of the basket is now below the Fed’s target of 2%. Following the CPI release, the Producer Price Index (PPI) came in lower than consensus expectations. Segments such as motor vehicle insurance and health care services showed a softer increase in price pressures in the PPI report, relative to CPI.

Though the 3-month annualized CPI rates are above the current 12-month rates, we do not see signs of a meaningful acceleration in prices. Much of the recent increase in the headline numbers is driven by energy, which is less meaningful for the Fed. Bessemer portfolios have a benchmark weight to the energy sector relative to the benchmark.

China Exporting Deflation Helps Lower U.S. Consumer Prices, But Also Creates Competition for Some U.S. Firms

What is happening: Treasury Secretary Janet Yellen traveled to China to meet with senior leadership as part of the Biden administration's efforts to stabilize the U.S.-China relationship during an election year. A chief issue raised was what the administration refers to as manufacturing "overcapacity" given that Beijing directly subsidizes certain industries such as electric vehicles and solar. At a recent press conference in Beijing, Secretary Yellen noted, "[T]here are features of the Chinese economy that have growing negative spillovers on the U.S. and the globe." While concerns over industrial overcapacity were at the forefront of Secretary Yellen's meetings, incremental progress was made on other fronts, including anti-money laundering cooperation and greater communication between the two countries’ financial regulators.

Why it matters: Chinese industrial subsidies and lackluster domestic economic activity have helped the inflation picture in the U.S. by driving goods prices lower. However, the administration is concerned that Beijing's policy of subsidizing certain domestic industries will undermine the competitiveness of U.S. companies in those same industries. Secretary Yellen has indicated that the Biden administration does not see additional tariffs as off the table, a position also held by former President Trump. The Biden administration is seeking to protect U.S.-based businesses from cheaper, subsidized alternatives from China in key areas such as battery technology as the competition between the U.S. and China grows more intense.

In addition, China is now experiencing repercussions as global firms reassess China production-related risks in their supply chains. As a result, a post-COVID trend of "nearshoring" or "friendshoring" has seen many companies begin to invest in new facilities closer to the U.S. or in countries more aligned with U.S. interests. Countries such as Mexico, India, and Vietnam are major beneficiaries of this trend. How the U.S. and China navigate their relationship regarding trade and industrial policy has huge ramifications for the U.S. consumer and the economy more broadly.

In the most recent Quarterly Investment Perspective, we note shifting trends within global supply chains and the impact China can have on lowering U.S. goods inflation. We continue to monitor these trends as they develop to position client portfolios to benefit in an ever-changing complex geopolitical and economic landscape.