A complicated month closed for equities and fixed income around the world; the main US equity index, the S&P 500, recorded its worst Jan-Apr (-13.3%) since 1939, dropping 8.8% in April alone. On the fixed income side, 10-year U.S. Treasury bonds, usually a safe haven asset in times of volatility, accumulated a decline of -11.05% for the year.

The nervousness observed during April stems from the drastic actions to be taken by central banks to combat ^inflation1, and the possibility that these measures will push the United States and the world into a new recession in the medium term.

The latest reading of the American ^CPI2 registers the inflation of said country at 8.5%, with energy and food being the main causes of the increase in prices. On the one hand, the European Union will ban imports of Russian oil, being Hungary and Slovakia the only countries exempted from such measure in the short term; on the other hand, remember that together, Russia and Ukraine export 30% of wheat and 18% of corn globally; both events contributing to shortages and consequently to price increases. Finally, the confinement in China, derived from the COVID-19 zero tolerance policy, was another factor that added to the inflationary and global growth risk.

Leaving inflation aside, U.S. GDP contracted 1.4% at an annualized rate during the first quarter, a figure we learned in the last week of April; and while the reading at first glance is negative, it should be noted that the downward bias was caused by volatile fluctuations in inventories and foreign trade, and not by consumption, which accounts for about 70% of the U.S. economy.

At Grupo Inversión, we believe that consumption will be the main factor to watch in the second half of the year. So far, U.S. companies have managed to raise prices, offsetting costs, without discouraging the end consumer. Proof of this is that 80% of these companies reported higher-than-expected profits during Q1. It will be necessary to closely monitor whether large corporations manage to preserve their margins for the rest of the year, or whether they will be affected by consumers increasingly impacted by inflation.

1. ‍TheFed raised its benchmark rate by 50 basis points on May 5 to a range of .75%-1%.
2. Consumer's Price Index