Inflation eases in US as US central rises interest rates by 0.75% . China loosens COVID measures

Prices for goods and services in the United States rose 7.7% during the 12-month period ending in October, the lowest annualized rate since January, leading to speculation that the efforts of the Federal Reserve to tame inflation through interest rate hikes may be bearing fruit. Supplier prices for the month of October in United States have slowed for the second month in a row, rising only 8% year-over-year, a decline from the 8.4% revised in September and yet another metric to indicate that inflation pressures could be easing. Markets rose in response to the report on hopes that it will be yet another convincing data point for the Federal Reserve that the aggressive rate hikes enacted this year are beginning to show noticeable effects on the U.S. economy, opening the door for easing.

The CPI report is being interpreted as really good news pushing the stock market to rise as the markets are pricing in a lower chance that the Fed is going to have to do another 75-basis-point rate hike (0.75%). There’s more chance than before that they'll only need to do a 50-basis-point rate hike (0.50%). However, officers from US central bank has called for a "more gradual approach" to raising rates and would rather err on the side of raising rates too much than raising rates too little, so it remains to be seen if there will be a change in the interest rate policy in the next FOMC meeting in Dec 2022.

Meanwhile, the China economy is still facing headwinds with Chinese e-commerce giant Alibaba Group Holding posted a smaller-than-expected rise in quarterly revenue as Covid-19 curbs and a worsening economic outlook stifled consumer spending. The revenue from Alibaba is closely watched as it gives an indication on the health of consumer spending in China. Retail spending in China has sagged this year with consumers frustrated by the government’s strict zero-Covid policies that have led to frequent snap lockdowns and hurt economic activity.

It could be due to this economic slow-down that China will be relaxing some of its Zero-Covid measures, including quarantine periods for inbound travelers and close contacts. As the world's second-largest economy, its covid curbs have weighed on stock markets due to its impact on supply chains as well as the global demand outlook. 

Portfolio Strategy

The portfolio swung back as investors are heartened that inflation has eased and there is an end in sight for the aggressive interest rates hikes. The cash portfolio gained 2.89%, CPF-IS loss 0.6% and the SRS portfolio gained 2.48%.

There is no change in the portfolio as the tech and small cap allocations out-performed the rest of the sectors during the stock rally as a result of an easing of the interest rates. If inflation figures continues to ease, this should benefit our portfolio tremendously. We should see the market rally into the end of the year as optimism on falling inflation will be the primary fuel of the recovery.