Fynsa
The U.S. CPI for October came in better than expected, with a 0.1% increase (3.2% year-over-year) and the core CPI, excluding food and energy, rising 0.2% (4.0% year-over-year); both figures came in one-tenth of a percentage point below expectations. Within the core component, the slowdown was concentrated in basic services, which rose 0.3% last month. While there was some moderation in rent inflation, most of the improvement occurred in basic services excluding rent—or “super-core” services—which rose by a modest 0.2% and stands below 4% year-over-year (see Charts 1 through 3).
This slightly weaker-than-expected inflation report triggered a rally in the markets, which now view the Fed’s rate hikes as fully priced in and see risks tilted toward rate cuts in the context of a soft landing (as opposed to recession-driven cuts) by mid-2024. (See Chart No. 4).
Our view remains that we have already reached the peak of this adjustment cycle, as highly restrictive financial and credit conditions will begin to have a more pronounced impact on economic activity in the coming quarters and pave the way for greater convergence of inflation—though it remains to be seen whether this can be achieved without an economic recession.
In terms of strategy, given the general narrative from major developed-market central banks suggesting that they are pausing or are close to doing so, we continue to recommend gradually shifting away from cash toward longer-term maturities and corporate bonds, since historically, fixed income begins to outperform cash before the Federal Reserve reaches its peak interest rate. Therefore, we believe we can find good opportunities with attractive yields, while focusing on improving quality (SEE MORE)
