We saw another historic example of intra-day volatility extremes for US stock indices during the New York session.
All in response to the release of the much-anticipated US Inflation report. Coming in at a bare nudge lower of just 0.1% from 6.5% to 6.4% on the year, and alarmingly re-accelerating on a monthly basis from 0.3% to 0,5%.
And with plenty more price pressures still in the shelter and services pipeline. It is not over yet.
Just as we warned, this is not a ‘game over’ situation by any stretch of the imagination. Though thoughts of a pivot were most certainly that.
With global oil prices firming and only the first signs of the flow through to gasoline prices heading up again so far in the inflation data, we are indeed looking at low-6s to higher inflation in the months ahead. Even staying above 5.5% puts us on track for another 4-6 Fed rate hikes.
As previously suggested, the Federal Reserve made a mistake by slowing to 25-point hikes too early. We suggested that this would only elongate the current tightening cycle. It is now more a case of death by a thousand cuts, than the previous scenario of getting hit by a freight train and then having to get back up.
The extended consistency of Fed rate hikes will wear on consumer, business and investment nerves alike. Further retrenchment of the consumer and business investment is a certainty.
Unfortunately, nothing has changed at all in our central economic theme of a long stalling US economy, resilient inflation to Fed hikes, causing ever higher Fed rates scenario.
This reality calls into question the veracity of the bulls argument to its very core. We are most certainly seeing a desperate struggle currently being played out between the very large institutions, which have become a renewed mix of believers in just buying anyway, and those who, like me, think this is all nuts and extremely worrisome. Such volatility can be a cue to a major reversal.
US consumers will continue to be hit by ever higher prices that stay high. Remember, without dis-inflation, the pain inflicted by price rises already remains.
On top of this, mortgage stress is growing, property prices are falling, and things are only going to get worse on the cost of all loans and credit.
We should all be prepared for a long winter, even through summer, for the US economy.
This reality will continue to play havoc with all asset prices in the USA, but bizarrely, could again be supportive of the US dollar. That is, until the tipping point, when everyone realises the USA is simply a bad bet for now.
Market insights and analysis from Clifford Bennett, Chief Economist at ACY Securities
