US inflation undermines markets optimism

written on September 14, 2022

The war in Ukraine has tended to increase uncertainty regarding inflation and growth prospects. When and with what consequences this war will end is pure speculation, but capital markets are expected to build a certain immunity to the headline risks in the coming weeks. The medium- to long-term consequences, on the other hand, could be significant. It is possible that we are at the beginning of a new bloc formation or a new Cold War. This would put a significant damper on globalization and further fuel higher structural inflation. 

US equities fell on Tuesday as a hotter-than-expected US inflation reading boosted speculation that the Fed will have to move even more aggressively to tame runaway price growth. The Dow plunged nearly 1,300 points and the S&P 500 fell 4.3%, marking their worst sessions since June 2020, while the Nasdaq 100 plummeted 5.5% in its sharpest decline since March 2022. European markets were not immune to the plunge, turning negative as soon as the CPI data was released. The Euro Stoxx 50 shed 1.6%, brought down by retail and tech shares. 

Summary

  • Asian shares tumbled on Wednesday, with the ASX 200 sinking nearly 3%, the Nikkei 225 plunging 2.2% and the Kospi dropping 1.8%. The Shanghai Composite and Hang Seng indices also fell at least 1%. 
  • European shares are set to join a global equity sell-off as futures contracts tied to the three major US indices are drifting between flat to slightly positive. 
  • Oil prices moved lower this morning, retreating further from a 1-week high hit in the previous session. Industry data released Tuesday showed that US crude inventories rose by about 6 million barrels last week, while traders await official data from the EIA on Wednesday. 
  • The annual inflation rate in the US rose 8.3% year-over-year and 0.1% month-over-month. This came in well above economists’ expectations for an 8.1% rise and 0.1% decline from July. Core CPI rose 6.3% year-over-year and 0.6% month-over-month. This compares to economists’ projections for core CPI to increase 6.1% year-over-year and 0.3% month-over-month. While a 75bps rate hike is still broadly expected next week, Fed funds futures point to an over 30% likelihood of a more aggressive 100bps increase. 
  • Elsewhere, the annual inflation rate in the UK unexpectedly edged lower to 9.9% in August from 10.1% in July and compared to market forecasts of 10.2%. Also, factory gate prices of goods produced by UK manufacturers increased 16.1% year-over-year in August, easing form a 17.1% in July and below market expectations of 17.4%, pointing to the lowest producer inflation since May. 
  • The jobless rate in the UK fell to 3.6% in the three months to July, the lowest since 1974, from 3.8% in the previous period and compared to market forecasts of 3.8%, as the number of people who are no longer looking for work increased. Meanwhile, wages adjusted for inflation continued to fall over the previous year. 
  • European Commission President Ursula von der Leyen will today call for radical steps to stem the energy crisis, edging closer to rationing measures and calling for a swoop on energy companies’ profits. The proposals she will set out in a speech before the European Parliament will intensify the fractious discussions between member states, which have different priorities and vulnerabilities. 
  • The French government lowered its economic growth forecast for next year, forcing it to delay tax cuts and keep tight control of spending. Disruption to business from volatile energy prices after Russia’s invasion of Ukraine, combined with households facing stronger inflation and difficulties for France’s main trading partners, mean the government now expects GDP to expand only 1% in 2023 instead of the 1.4% it forecast in July. 
  • Twitter shareholders voted in favour of the social media platform’s proposed $44 billion acquisition by Tesla boss Elon Musk during a special meeting. The pending merger is heading for an October trial after Twitter sued the billionaire for pulling out of their agreement a month after signing a deal in April. 

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