Although markets have shrugged off news that US inflation rose faster than expected in January, two Invesco portfolio managers have warned continued price increases could pressure risk assets.
On February 14, the US government announced the Consumer Price Index (CPI), the indicator of household inflation in the US, rose 0.5% against expectations of a 0.3% increase. The S&P 500 dropped on the news but quickly recovered to close at its highest point since February 7.
Investors had been anticipating the CPI report as higher inflation could lead the US Federal Reserve to hike interest rates more aggressively, Invesco fixed income portfolio managers James Ong and Noelle Corum wrote in a note penned February 14.
Analysts expect the Fed to increase rates by 0.25% at its next meeting on March 20-21, and the recent inflation figures are likely to trigger questions about how many more hikes are on the horizon, the duo added.
‘If the bond market believes the Fed needs to hike interest rates more aggressively, market volatility could pick up and risk assets [such as stocks and credit bonds] could come under pressure,’ wrote Ong and Corum, from Invesco’s fixed income group.
Still, certain sectors offer opportunities as inflation rises. PineBridge Investments multi-asset portfolio manager Agam Sharma wrote in a February 13 note that some companies have been investing to boost their productivity.
As inflation gives way to higher interest rates, investors should own companies whose cash flows benefit from increased efficiency. These include cloud computing firms, fintech enablers and automation process providers, according to Sharma.
‘Fixed coupons need to compete with a rising rates curve, but accelerating cash flows can outrun the rates curve,’ he wrote.