Centerfin Collective Weekly

Weekly Update March 3, 2023

Hot inflation abroad, Consumer stretched, Vanguard bucks ESG trend

Hot inflation abroad

Inflation accelerated in many of the Eurozone’s largest countries, including Germany, France, and Spain. Eurozone’s core inflation came in at a record 5.6%. Service inflation and wages were large drivers. The hot data will likely lead to a 50 basis point increase in interest rates next week by the European Central Bank. This also sparked a bond market sell-off, which led yields to the highest levels in Europe in more than a decade. At the same time, the data from China continues to come in strong. Chinese PMIs are well into expansionary territory, indicating economic growth. In Japan, inflation is near a 42-year high, exceeding BOJ targets for nine straight months. Inflation is a global problem that remains sticky. This is consistent with the view that interest rates are likely to remain higher for longer than most are expecting.

Consumer stretched?

A number of large retailers reported earnings this week, including Target, Costco, Kroger, Macy’s, and Best Buy. The pattern emerging from management comments is that the consumer is spending less on discretionary items while enduring higher prices for necessities. This is evidenced by sales declining at Best Buy and Macy’s while continuing to grow at Kroger and Costco. Last week Walmart reported earnings and noted an increase in higher-earning customers looking to save money. Consumer spending is the largest component of the US economy, so paying attention to spending behavior gives an insight into the state of the economy. The consumer has held in well, given leftover excess savings and stimulus from the pandemic, as well as a tight labor market. The dynamic described by retailers could be an early sign that consumers are beginning to feel stretched.

Vanguard bucks ESG trend

Vanguard, one of the largest asset managers in the world, announced they are pulling out of the Net Zero Asset Managers initiative. The initiative, part of the ESG movement (environmental, social, governance), was launched to encourage asset managers to restrict their investments to companies that are compliant with a net-zero greenhouse gas emissions objective by 2050. We have long maintained that ESG policies are not as simple as not investing in certain companies. We hope this move by Vanguard serves as a starting point for a more thoughtful approach for the industry.

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