Market Rise Following US Inflation Data Raises Doubts

Market

Market Rise Following US Inflation Data Raises Doubts

Risk assets have benefited from the July US inflation report that was lower than anticipated, but economists worry that some investors may be getting ahead of themselves. 

Bets that the Federal Reserve may become less aggressive on interest rate rises helped drive the surge that sent the S&P 500 to a three-month high and the Nasdaq 100 to a level more than 20% above its June trough. Market watchers still issued a warning, saying that before changing their minds, policymakers would need to see signs of a slowdown in price increases for many more months.

Following the release of the CPI data, European markets rose to their greatest level in two months before giving up the majority of their early gains. US futures were likewise trading below their session highs.

Market analyst at Robert W. Baird & Co. Michael Antonelli said, “We were pricing a much more severe slowdown than we’ve seen so now it’s repricing for a different outcome.” That doesn’t imply we immediately return to all-time highs, but rather that the possibility of a hard landing is slipping into the past.

Here are some predictions about the future of markets:

Federal Rate Climbs to 4%

“The market reaction is undeniably positive, but we think overdone,” said John Velis, an FX and macro strategist at Bank of New York Mellon. “We still think the Fed will move rates up close to 4% by the end of the year or beginning of 2023, and that inflation, while decelerating will remain uncomfortably high.”

Policy-Rate Plateau

“The CPI release does not indicate a pivot to dovishness for the Fed. It reduces the risk that dramatic moves such as raising the target rate by 100bps in September or an inter-meeting hike will be needed,” Sarah Hewin and Steve Englander, at Standard Chartered Bank, wrote in a note. “We expect that by Q4-2022 the evidence of economic slowing will be enough to lead to a pause, but the now-priced-in 2023 policy rate cuts will become a policy-rate plateau.”

Targeting Volatility

“VIX is trading below 20 for the first time since April and VIX term structure has steepened to the highest levels since April,” said Chris Murphy, derivatives strategist at Susquehanna International Group. “Lower volatility levels could open the door for more equity buying from the vol targeting community.”

Look Beyond 60/40

“Are we really at peak inflation and peak hawkishness from the Fed?” wrote Saira Malik, chief investment officer at Nuveen. “While market odds of a third consecutive 75 basis points rate hike at the Fed’s September meeting fell dramatically after today’s CPI print, we doubt the Fed will be deterred from continuing its already-aggressive tightening path based on a single CPI report.”

Malik favours certain energy names, US big caps with a lean toward high-quality growth businesses, and companies that are raising their dividends. Using real assets like farms as inflation hedges via consistent cash flows and built-in CPI escalators, investors should go beyond the conventional 60/40 equity-fixed income portfolio, she said.

Australia Under Pressure

The Australian dollar increased last night after the publication of the CPI data, but Carol Kong, a strategist at Commonwealth Bank of Australia Ltd., predicted that it “will likely remain a hostage to the broad USD trends and changes in the world economic outlook.” Market participants are anticipated to further lower the prognosis for global growth as a result of increasing global interest rates and high inflation, which is bad for the pro-cyclical AUD.

“I think the downward pressure on the AUD will continue as I am still of the view that the Fed will be far more aggressive on rates than the RBA will turn out to be,” said Alex Joiner, chief economist at IFM Investors Pty. “I think volatility will continue through markets as they still struggle to price elevated inflation and a deteriorating economic outlook.”

Smooth Retreat Improbable

In pricing for the policy rate peaks next year, the market got a little ahead of itself, according to Stephen Miller, an investment consultant at GSFM, a division of Canada’s CI Financial Corp.

“We need to resolve just how sticky inflation is and whether the market’s benign view of that and of the Fed ends up being accurate. Any smooth retreat toward 3% in the space of two years still looks to be a big ask,” he said.

Cut Back On The Euphoria

“While this means some relief for the risky Asian assets at the margin, we do think there will potentially be more hawkish Fed speakers that continue to bring up the market pricing of Fed’s tightening cycle,” said Charu Chanana, a strategist at Saxo Capital Markets Pte in Singapore. “That could potentially limit the euphoria in Asia.”

Peak Bear Rally

“The market could run out of positive catalysts after today’s spotlight moment, suggesting the current bear rally is also moving towards its peak,” said Hebe Chen, an analyst at IG Markets Ltd. Plus, once investor expectations settle on a 50-basis-point hike next month, “the pre-set playbook (i.e., 75bps) will turn out to be an unwelcomed surprise.”

By the end of the week, Australian stock market traders may decide to “remain cautious” since, according to her, “we will welcome our job data next week, which is expected to prove that inflation will stay for long.”

online sources: yahoo.finance.com, cnbc.com



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