Weekly Market Insight: Inflation Rate Hit the Lowest Level

Inflation in the US has slowed, with consumer prices rising just 4.9% in April, the lowest in two years. However, Inflation concerns may be easing only in the short-term, which suggests that consumers may pull back on spending. Equities fell and bond yields rose after the report.

What you need to know

Federal Reserve member Bowman stated that additional rate hikes are “likely appropriate” if inflation remains high and the labor market remains tight. While Fed policy is now restrictive, it is uncertain if it is sufficiently so to bring down inflation. President has nominated Philip Jefferson to the position of vice chair, US World Bank representative Adriana Kugler as a member of the Fed board, and Lisa Cook to serve a second full term on the Feb board.

Equities have retreated due to unresolved concerns over the debt ceiling and a surge in bond yields driven by higher surveyed inflation expectations. Investors have shifted from cyclical to defensive stocks, with utilities and consumer staples gaining traction while consumer discretionary and financials experience a pullback.

Many large corporations, including Meta and Disney, have shifted their focus away from the “growth at all costs” mentality and instead prioritize profit. Meta’s announcement of 11,000 job cuts six months ago sparked similar moves from other tech companies, and media giants Netflix and Disney followed suit. So far, this newfound cost-consciousness has been successful, with Meta’s stock up 170% and Netflix’s up 100% from their respective lows.

Even tech giants like Microsoft, Amazon, and Alphabet have seen positive reactions from investors due to their increased discipline. However, these companies are still a long way from their past highs, largely driven by revenue growth. While cost-cutting can help expand profit in the long run, growth in sales is necessary for sustainable success.

What’s happening in Singapore

The financial performance of DBS in the first quarter of 2023 beat estimates due to strong trading income and resilient net interest income. However, the growth in net interest margins is expected to fade, and asset quality remains a key risk as non-performing loans are expected to increase due to slowing global growth. Despite this, DBS has strong capital and liquidity levels and higher return on equity, which should continue to support investor confidence.

The overall REIT portfolio performance was better in the March quarter but was offset by higher funding and operating costs and adverse foreign exchange movements. The managers talked up recycling and opportunistic divestments, and there is room for rotation and selective opportunities in a range-bound sector outlook. While the rate pause may bring forth optimism, sustainable re-rating will only come from better growth or rate cuts.

See how rising interest rate affect REITs

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