Market Overview

Inflation is back in focus with expectations that the US Fed would pivot quickly disappearing. Rising costs remain an issue with the prices paid section of The ISM survey of manufacturing rising above 50 – indicating higher input costs. Growth in unit labor costs was also revised sharply higher for Q4. The economy continues to remain resilient and labor market tight, and the rhetoric from Fed officials indicate that higher rates could persist for longer.

On the other side of the Atlantic, high labor costs remain a challenge with the ECB expected to raise rates by 50 bps this month. Core inflation rates rose from 5.3% to 5.6% in February, with ECB officials citing wage growth as a cause of concern in order to meet the 2% inflation target. An additional hike of 50 bps is expected in May and another 25 bps in June meeting.

PMI data for China with actual data well over forecasts. However, it remains prudent to be cautious past investing in the short term as uncertainty still exists around property prices, where household wealth is tied up. Defense spending in China was boosted by 7.2% this year, signaling the shift in geopolitics and a transition to a multipolar political situation stroking tension in the US.  Geopolitics will remain an important investment theme for the year,

US Fed Chairman Jerome Powell’s testimony to the Senate and release of February non-farm payrolls will be important calendar events for the week.

Commodities, FX and Bonds

Given market expectations that interest rates will remain higher for longer, investors should stay cautious and allocate away from high yield corporate bonds – the share of low-grade B-rated debt in rating indexes is the highest in 10 years. Corporates in general will face more pressures on margin and profitability. 

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