US Federal finances illustrated in one chart
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The 10y breakeven inflation rate, a common market measure of expected inflation over the next decade, only nudged to 1.91%; still below the 2% threshold and well under the roughly 3% levels seen after Russia invaded Ukraine. This suggests that markets do not currently expect the conflict to have lasting inflationary effects. Source: Bloomberg, HolgerZ
Investors are currently facing major unknowns: 1/ A major conflict in the Middle East. In this context, we believe investors should not lose sight of what we think remains a positive backdrop for stocks; 2/ The pendulum around AI which continues to swing between fear and excitement; 3/ Uncertainties about tariffs. But in this context, it is key to NOT OVERREACT to headlines and to keep in mind that the overall context remains positive for stocks: 1/ Corporate earnings continue to strengthen within and beyond AI 2/ The Fed maintains a bias toward easing 3/ The U.S. economy appears to be on track for another year of solid growth. On the later, US economic news published yesterday were impressive, starting with the solid ADP and ending with the blowout Service ISM number. The ADP number was the day's first positive surprise, as private jobs surged 3x from January and beat estimates, as they rose to 63K, the highest since November. Then it was the Service ISM print which smashed expectations (a 6-sigma beat), rising the most since Sept 2024 to the highest level since July 2022. The stagflation narrative was crushed, as the ISM's Prices Paid index tumbled to an 11 month low while everything else rose. The Citi US eco surprise index jumped from 30 to 39 in one session following the unexpectedly strong economic data. This set of very positive data was good enough to offset some of the scary news on the war front and propelled risk assets higher yesterday. Source: zerohedge
While emerging markets typically depend more heavily on commodity exports compared to developed markets, they also use a greater share of commodities relative to their GDP. This makes them vulnerable to the indirect consequences of higher oil prices, such as slowed global economic growth. Noteworthy exceptions include Brazil and Russia. Source: Goldman Sachs, Markets & Mayhem