Andrew Van Sickle editor@moneyweek.com
It’s just as well Dry January is over. Not only have those who put themselves through it finally started talking about something else, but US investors now also have all the more reason to resort to a stiff drink. They were looking forward to reductions in interest rates this spring. But unexpectedly sticky US inflation in January suggests that it could be a lot longer before the US Federal Reserve can reduce the price of money; if February’s figures point the same way, expectations of a further interest-rate hike may spread.
Core inflation, which excludes volatile food and energy prices, ticked up by 0.4% in January, the biggest jump since last May. On an annual basis it is climbing at 3.9%, the same pace as in December. The downtrend of the past year appears to have stalled. The cost of home insurance is rising at its fastest annual pace since 2015. Car-repair prices are also rising. “Inflation in services shows little sign of easing,” concludes The Wall Street Journal.
Savings spent
Investors who blithely assume that the US economy will just keep motoring may also be in for a rude awakening. Around 70% of GDP stems from consumption, and a key reason spending was so robust last year was that households had amassed $1.2trn in excess savings. This well is running dry, as Campbell Harvey points out in a note for Research Affiliates. Delinquencies in consumers’ loans have been trending upward recently, and nobody borrows on a credit card until their savings have gone.
Bear in mind too that the average interest rate on US government debt is just 3.11%. With short-term interest rates above 5% and long-term ones above 4%, the average rate on state debt is set to jump in 2024 as existing debt rolls over and the government borrows more. “The ballooning debt and debt service put upward pressure on long rates, thereby impeding business investment and growth.” US commercial property companies grappling with huge post-Covid vacancy rates will also have to refinance loans, potentially putting banks at risk.
All these headwinds for the buoyant US stockmarket dominated by the magnificent seven technology stocks (see page 4) are in addition to another: high valuations. It’s not just that the market-leading stocks are “priced for perfection in this world but also the next”, as Michael Lewis puts it in the Credit Strategist. The mean-reverting cyclically adjusted price/earnings ratio, widel
