Experts and financial strategists at Monday’s Future Proof wealth conference identified four major themes influencing the economy and the stock market at the present time, each of which is surrounded by ambiguity and posing difficulties for investors.
According to Barry Ritholtz, chief investment officer and chairman of New York-based Ritholtz Wealth Management, these macro-dynamics include inflation, the Federal Reserve’s interest-rate policy, the strength of the U.S. currency, and the Russian invasion of Ukraine.
U.S. inflation accelerated from May’s 8.6% to June’s 9.1% before slowing to July’s 8.5%. Economists, experts, and stock market investors are hoping to see a falling trend in US CPI statistics, but the core inflation may still be a cause for worry. According to José Torres, Senior Economist at Interactive Brokers, “The FED is especially concerned with core categories as ongoing pricing pressures pose the danger of inflation being further entrenched in the economy as well as in the psyche of people and company impacting behaviors.”
Since March of this year, the Federal Reserve has gradually increased interest rates in an effort to bring inflation down to manageable levels.
The Federal funds rate serves as a benchmark interest rate and Federal Reserve officials have revised their projections for how soon and how much they would increase it to reach their aim. The US government reported yesterday that the annual growth rate of the Core Consumer Price Index (CPI) was 6.3% in August, up from 5.9% in July. The pace of inflation in the United States (and elsewhere) is not decreasing. The markets, as written on this page, have adjusted their expectations for the Fed’s next meeting next week to reflect yesterday’s CPI statistics and now see a 25% possibility of a 100bps rate rise. Because of this, the yield on the 10-year US Treasury note rose to 3.412%, while the yield on the 2-year note rose to 3.76 %, its highest level since November 2007.
The dollar index DXY, which measures the greenback’s strength against a group of other currencies, rose 1.5% to 109.85, its highest point in one day since March 2020.
Financial markets across the world will continue to closely monitor developments in US inflation for at least the next several months. The reason for this is the uncertainty around whether or not inflation has peaked and will continue to rise in the coming months. While it appears unlikely right now, the reaction of the stock market suggests the top has passed. Prior to the announcement of US CPI statistics on September 13, the stock market had risen by roughly 5% over the previous 5 days. The Federal Reserve may hike interest rates sharply at its meeting next week in response to inflation data for the United States that greatly outpaced forecasts. According to numbers published on Tuesday, the consumer price index rose 0.1% in August and 8.3% from a year earlier.
The data had a significant impact on the market because it showed that inflationary pressure is still persistent in several sectors. This increased the likelihood that the Fed would raise interest rates by 1% at its next meeting, rather than the 0.75 percent that is still barely remaining as the consensus forecast. This increased hawkishness on the part of the Fed led to a sharp appreciation of the US dollar, a sharp decline in global stock markets and other risky assets, the highest yield on the 2-year US Treasury note in years (at 3.8%), and a deeper inversion of the yield curve. The Nikkei 225 and the HSI, two major Asian indexes, are both down by more than 2% today, while the S&P 500 Index suffered its worst day in two years yesterday.
Inflation reduction below 2% is the target of the Fed’s rate rises, which will inevitably lead to a decline in the number of available jobs and an increase in the unemployment rate. Torres explains that “FED tightening has contributed to price drops in products and commodities via demand losses,” but that “services and rent are far more resistant” and will need additional rises in the jobless rate to cool down.
The extent to which the Federal Reserve might raise interest rates before calling it a day will be closely scrutinized by the markets. The FED is still dedicated to reducing inflation, therefore August’s data on inflation won’t change its minds. The process of drawing down liquidity and increasing interest rates will continue until 2023, with the final rate reaching 4.28 percent. As a result of this, Torres predicts that the yield on the 10-year Treasury note will increase to above 3.6% in the coming months.