On Wednesday, US stock markets were heavily burdened with inflation figures, which showed the highest price growth in 30 years in the US.
The biggest drop was the tech-heavy Nasdaq, which ended the trading day down 1.66%. The broad S&P 500 index fell 0.82 percent, while the Dow Jones Industrial Average fell 0.66 percent.
From October of last year to this year, consumer prices rose 6.2 percent, a price increase not seen in the United States since 1990. On a monthly basis, prices are up 0.9 percent.
It is the economic effects of the pandemic that are causing inflation to rise – stress on supply chains, production problems and increased purchasing power among consumers all help drive inflation.
Inflation was previously expected to rise by 5.8 percent, according to Trading Economics. On a monthly basis, inflation was expected to rise by 0.6 percent. Inflation is measured by price increases in everything from food and rent to medicine and fuel.
Olaf Chen, director and head of global allocation and interest rates at Storebrand, believes that inflation will continue at the same level in the coming months.
The market and players have long said that this inflation is temporary, but we don’t see any sign that this is fading out yet. He says the next number can be as high as this.
– Our estimate is that inflation can only see the number 4 in 3-6 months, and it can then fade away. We are seeing that rent prices are still going up, and food prices are going to keep going up in many places for temporary reasons, he says.
He thinks interest rates need to rise
He disagrees with many market players, including the US Federal Reserve, which believes that US inflation will fall as fast as it is rising.
We believe the reversal will take longer, in large part due to upcoming wage growth in the US next year. Chen says this wage inflation will continue to hit the central bank’s neck for several months after that.
He stresses that inflation does not come only from the crisis of suppliers and global bottlenecks in the production and transportation of goods.
Everyone talked about inflation from bottlenecks on the supply side, but we also think the demand side is an important driver of inflation now, he says.
This is where central banks and authorities can do something, for example with higher interest rates or higher taxes, with so-called less expansionary monetary and fiscal policies. But no one wants and dares to make such unpopular choices, and in the long run that could lead to even bigger bubbles, he says.
– We believe that interest rates should go up and will go up, and we have positioned the portfolio accordingly, ie valuable stocks that are put in good standing if interest rates go up.
The ten-year-old child rises
The Nasdaq fell more than 2% on Wednesday. The decline increased in line with higher long-term interest rates. The interest rate on US government debt with a ten-year maturity, often referred to as the 10-year period, rose after inflation figures were published.
At close on Wall Street, the 10-year-old, often called the “world’s hottest interest rate,” hit 1.559 per cent, up from 1,458 earlier in the day.
The tech-heavy Nasdaq often fluctuates with its ten-year-old US counterpart, because interest rates are especially important for tech companies. As the ten-year-old goes up, the Nasdaq often goes down. This is because the pricing of many technology companies is based on future profits. When interest rates rise, it will be more expensive for companies to borrow money, and future income will be relatively less valuable today.
Inflation is much higher than the target
To US CNBC, Nancy Davis, who is in charge of Quadratic Capital Management Fund, said the new inflation figures are well above the central bank’s 2% inflation target.
“If inflation is not curbed, the central bank will likely have to tighten as interest rate increases further, which could hurt stocks and bonds,” Davis says.
To the Wall Street Journal, economist Laura Rosner Warburton of MacroPolicy Perspectives said the US is entering a six-month period of unusually high inflation.
I think we are entering a new phase in which inflation is wider and things are more severe. Parts of it reflect that the bottlenecks aren’t resolved on the way into the Christmas season, where there’s plenty of shopping and the economy is doing really well, so you have strong demand, according to the Wall Street Journal.
Inflation figures caused US President Joe Biden to walk out with reassurances in a press release.
“Inflation is hitting Americans’ wallets, and reversing that trend is a top priority for me,” he said in a press release.
Inflation in the US has been a major issue this year. At the beginning of the year, expectations began to rise that inflation in the United States would rise, after a year of very low inflation. Before the summer, inflation in the US had risen dramatically, and had been high in recent months.
Inflation is a term that refers to the sustained growth in the general price level of goods and services in a society for a given period. Expectations of future inflation affect market interest rates in the economy and economic activity, and are therefore important for developments in financial markets.(Terms)Copyright Dagens Næringsliv AS and/or our suppliers. We would like you to share our cases using a link that leads directly to our pages. All or part of the Content may not be copied or otherwise used with written permission or as permitted by law. For additional terms look here.
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