Early Tuesday afternoon, the results for August’s overall US inflation came out: price growth ended at 8.3 percent year-over-year. In advance, a price increase of 8.1 percent was expected.
When the stock market opened on Wall Street at 15.30 NST, investors gave their verdict on the news. The sharp rise in prices triggered fresh turmoil in the nervous stock market and pushed the three major indices lower from the start.
The decline increased throughout the evening, ending with the worst trading day in more than two years when all major indices ended sharply lower:
- The broad S&P 500 index fell 4.33 percent
- The heavy Dow Jones Industrial Average fell 3.94 percent
- The Nasdaq Technology Composite Index fell 5.16 percent
That was even worse for the broad S&P index, which had its worst trading day since June 2020 when it fell more than 4.3 per cent. The decline stands in stark contrast to the index’s strong rally in recent days. At one point, the index rose as much as five percent after investors believed to a greater extent that the Federal Reserve had managed to cool inflation, he writes. The New York Times.
“The pace this fall has been amazing, but at the same time markets have largely recovered from the lows we have seen in the recent past,” said Jeff Kjellberg, founder and CEO of KKM Financial. CNBC.
Tech giants fell hard
The tech-heavy Nasdaq had its worst day of the year with a drop of more than five per cent.
Among the heavyweights that lowered the index, we find Google’s owner Alphabet, which closed down less than six percent. At the same time, Apple and Microsoft shares fell 5.9 and 5.5 percent, respectively. Facebook owner Meta fell more than 9.3 percent and Netflix fell 7.7 percent.
Higher price growth than expected
The 8.3 percent price increase in August was lower than the 8.6 and 9 percent measurements, respectively, in July and June.
At the same time, it is higher than the consensus expected in advance – according to Handelsbanken Capital Markets, inflation was expected to total 8.1 percent in August.
On a monthly basis, total inflation was 0.1 percent – previously, for comparison, overall inflation was expected to be minus 0.1 percent.
Meanwhile, core inflation, which ignores energy and food prices, ended at 6.3 percent.
This is higher than the two measures taken in July, which showed a core inflation rate of 5.9 percent, and what was previously expected. According to the report, core inflation was expected at 6.1 percent in August The economics of trading.
On a monthly basis, core inflation was 0.6 percent, double what had been expected.
A jump in the interest rate markets
The fact that inflation numbers are higher than expected has had a direct impact on both the equity and interest rate markets.
The yield on 10-year US government bonds jumped seven basis points in a few minutes, according to reports CNBC.
“Interest rates are going up here significantly, and that gives a huge boost to interest rate expectations,” says Kjetil Olsen, chief economist at Nordea Markets, when DN spoke to him right after the inflation figures were released.
He says, for example, that the interest rate on US government bonds with a maturity of two years jumped by 17 basis points in a few minutes.
I don’t think that’s the number the Fed was hoping for. It certainly shows that inflation is not going to drop immediately, and it supports the assumption that there is more work for the central bank, to get something done about it.
They prioritize inflation over growth
Tuesday’s inflation number is also one of the last things the US central bank will get from US macroeconomic numbers before it makes its next interest rate decision – which will be held next week.
The market sees it unlikely the Fed will do anything other than a triple hike – according to CME Group’s FedWatch tool, the market rates around an 88 percent probability of a 0.75 percentage point rate hike.
Kjetil Olsen believes that Tuesday’s inflation figures remove doubt that the Fed will come up with something other than a new triple hike next week.
Handelsbanken Capital Markets wrote in its morning report on Tuesday that although overall US inflation is expected to decline somewhat, the market is still pricing in interest rates rising to their highest level of more than four percent in 2023. .
Market prices are rising day by day. The Fed’s rhetoric was clear: it prioritizes inflation over growth. This means that they will keep the policy rate in tight territory, despite weak growth expectations and a possible recession, until they see clear signs that inflationary pressure has abated and is approaching the 2% target, Handelsbanken wrote.
Today, the Fed’s interest rate interval is 2.25 to 2.5 percent, and Kjetil Olsen thinks this should go up “a few percentage points.”
— before they take a break and stop as soon as possible, he says.
will break the price increase
The goal of raising interest rates is to break price growth, which has reached its highest levels in decades. Behind the price hikes, among other things, is a strong and tight labor market – which in the US has been stronger than expected for several months in a row.
The rate is usually raised 0.25 percentage point each time – but this summer the US central bank went for it tripartite twice. In the last week, the European Central Bank also went on to raise interest rates by a similar large, after inflation in the euro area grew to 9.1 percent in August.
Central banks’ ambition is to slow the economy back on track with a 2% increase in prices – and avoid a crash.
The United States has a slightly different problem compared to Europe. They don’t have the energy crisis and cost-of-living crisis that you see in Europe — which is doing part of the job of slowing the economy down, Olsen says.
In the United States, the central bank has to do more on its own. There is still a somewhat stimulus monetary policy in the US as we see it, and interest rates aren’t very high either. As he says, we think the Fed thinks they should tighten more.
Ahead of the inflation figures, the US sentiment index was also published on Tuesday.
The index was designed by the NFIB (National Federation of Independent Business), and measures sentiment among small American businesses. According to TDN, it showed a slight increase from 88.9 points in July to 91.8 points in August.(Conditions)Copyright Dagens Næringsliv AS and/or our suppliers. We would like you to share our cases using the links that lead 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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