Active Thinking

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At GAM Investments’ latest Active Thinking forum, David Dowsett discusses the latest inflation figures and the likely implications for monetary policy, the strong US dollar and the upcoming earnings season.

20 July 2022

David Dowsett, Global Head of Investments

The latest US Consumer Price Index (CPI) number was a focus point in the last week – rising by 9.1% year-on-year and reaching its highest since 1981. Consequently, there was temporary speculation about whether the Federal Reserve (Fed) will raise rates by 100 basis points (bps) at its next meeting. That has been somewhat quashed and, in our view, we will most likely see another 75 bps hike at the end of this month.

A notable effect of the CPI announcement has been the performance of the Treasury curve – which saw a marked inversion – signalling the market’s general view that the Fed will now act to control inflation, but therefore raising the risk of a recession as it does so. Closely related to this move higher at the short end of the US interest rate curve, we have also seen the US dollar strengthen and move closer to parity with the euro. We think USD-EUR is worth monitoring as previous periods of very strong dollar performance – such as 1998, 2008 and 2020 – have been associated with a credit event of some kind. Presently, it is uncertain if that will be the case, but it is important to monitor nevertheless, in our view.

We will now likely see a focus on earnings releases, with financial and big tech companies currently reporting, as well as the upcoming European Central Bank (ECB) interest rate decision. In relation to earnings, we saw the first marked move down in assets under management at the leading investment banks last week. With regard to the ECB, we expect to see rates rise by 25 bps – as opposed to the speculated 50 bps – and we also expect a renewed focus on the anti-fragmentation tool following political events in Italy, with spreads of Italian government bonds widening in recent days.

Important legal information
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is not a reliable indicator of future results or current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented and are not necessarily held by any portfolio or represent any recommendations by the portfolio managers. There is no guarantee that forecasts will be realised.

David Dowsett

Global Head of Investments
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