Traders screen a press conference with Federal Reserve Board Chairman Jerome Powell after the announcement of Federal Reserve Board interest rates on the floor of the New York Stock Exchange (NYSE) on July 31, 2019. is showing.
Brendan MacDermid | Reuters
April’s ferocious consumer inflation data surprised the market and raised concerns that the Fed was wrong about the temporary rise in prices.
If the Fed isn’t right, it means it can start solving simple policies faster than expected and eventually raise interest rates.
The· April consumer price index rose 4.2% From a year ago, the most active pace since September 2008. Economists expected a large figure of 3.6% for the basic effect of explaining last year’s weaknesses. However, the surge in the CPI surprised the market, increased Treasury yields and lowered stocks.
The CPI measures a basket of goods and energy and housing costs. Excluding food and energy, core CPI increased by 3% year-on-year and 0.9% on a monthly basis, compared to their respective estimates of 2.3% and 0.3%.
In stock, already low, Buckling under inflation concerns When the Ministry of Labor released the report on Wednesday at 8:30 am. Technology was sluggish and losses on the Nasdaq accelerated. The S & P 500 fell 1.6%, while the index fell 2% in the afternoon trading.
“The tug of war has intensified,” said Quincy Crosby, chief market strategist at Prudential Financial. Equities are already under pressure to fear that inflation will recover, squeeze margins and undermine corporate profits.
“How long is it temporary?” Crosby asked. “This is all about offering more uncertainty in a still expensive market. Even with a pullback, it’s still expensive …. see how the market takes it into account. Must see it as part of the resumption ?? “
The Fed has warned of short-term high inflation as the economy resumes and inflation looks even hotter in comparison to last year’s pandemic-shocked economy. Federal Reserve Board Vice-Chair Richard Clarida said Wednesday morning that he was surprised by the hot CPI data, but reiterated that the inflation surge should be temporary.
The Federal Reserve Board has stated that it will tolerate inflation above the 2% target and will consider the range of inflation that can be tolerated. But the concern is that inflation is getting too hot and the Fed has to keep raising interest rates. This is a minus for stocks.
“Pandemic is everywhere,” said Mark Zandi, chief economist at Moody’s Analytics. Zandy said the consumer price index was amazing, but he expects inflation to surge relatively short-lived. “Companies are only normalizing price cuts during the pandemic, but the underlying inflation is very strong. It’s strong.”
In some areas, such as used cars, there were far stronger monthly profits than expected, Zandy said. Used car prices rose 10% in April alone.
Airfares in April rose 10.2% and hotel and motel room rates rose 8.8%. Car rental prices in April rose 16.2%. Some products also showed strong prices, with children’s shoes up 4.2% and men’s trousers up 2.3%.
“The Fed wants to raise inflation, but when it’s clearly in the middle of it, it starts to draw lines and worries that acceleration isn’t exactly what it wants and may overheat. “I’m sure investors are worried about it today,” Zandy said.
Zandy said airlines and hotels have pushed prices up faster than expected, but still expect inflation to subside during the summer. He predicts next year’s pace will be 2.5%.
Crosby said the stock market is concerned that inflation could rise in the long run.
“We have to argue that it is positive. It is positive because the economy is reopening. It is recovering with the opening, but there are other problems,” she said. “The Fed also wants higher inflation, can you control it? … pay attention to what you want.”
The· Treasury yield for 10 years, It moves at the opposite price, but rose from about 1.62% after inflation was reported to 1.66% in early trading. After that, it rose to 1.69%.
Ian Ringen, head of interest rate strategy at BMO, said futures market expectations for the Fed’s rate hike advanced from mid-2023 to December 2022.
“If the market really believes that the Fed will react dramatically to this number, there is a move of more than 4 basis points. [0.04 percentage points] “At the Treasury yield,” Ringen said. If these types of numbers follow, the Fed needs to reassess how they see the temporary at some point. “
Technology and growth, the most expensive part of the market, are most responsive to inflation concerns and the threat of rising interest rates. Nasdaq, home of many high flyers, has already fallen 6% in May alone.
Since the beginning of the second quarter, technology is the only major S & P sector that has fallen 0.2%. Materials have risen by more than 10.5% during this period, and energy has risen by 8.5%. These sectors are benefiting from inflation and can take over higher prices.
Crosby said the interest rate risk of tech companies is high.
“The cost of their capital is higher for them, and the other aspect to it is the fact that Big Tech is responsible for a significant portion of these higher valuations when looking at market valuations,” she said. Said. “If interest rates remain bottomed out, we can have a more expensive market. If the calculus changes, we need to question the other part, the market price on a P / E basis. “
“The question is, will all this level off at higher inflation levels,” Crosby said. “There’s a lot the Fed can do to dispel concerns … even if you’re in the camp, it says inflation will rise as the economy normalizes.”
Inflation spies stocks and raises fears that the Fed is wrong in raising prices
https://www.cnbc.com/2021/05/12/inflation-spooks-stocks-and-raises-fear-the-fed-is-wrong-that-the-price-spike-is-temporary.html Inflation spies stocks and raises fears that the Fed is wrong in raising prices