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The latest US inflation data was released on Tuesday evening. The consumer price index rose by 5.4% year-on-year in June. Analysts had expected a much lower reading of 4.9% year-on-year. What reaction should we expect from the markets?
S&P 500
The depreciation of the US dollar is gaining momentum. Companies and individuals have less and less faith in Fed officials who claim that the situation is under control. For half a year now they have been explaining to us the rise in inflation as a temporary factor which will last for a couple of months. Those couple of months are long gone.
It’s time to finally be honest and admit that our money is rapidly losing purchasing power. More and more investors are realising this and are looking to get rid of their cachet.
That’s why the stock markets’ reaction to rising inflation has changed. As recently as 3 months ago the news that the consumer price index had beaten the experts’ forecasts, led to a sharp fall of the stock markets. The reasoning was as follows. Prices are rising, which means that the Fed will soon roll back its quantitative easing programme and raise interest rates.
However, for the second month in a row, the logic becomes different. It no longer matters whether the Fed plans to raise interest rates sooner or later. We need to get rid of the US dollars lying in brokerage accounts anyway.
And, oddly enough, stocks (even overvalued ones) become a great solution to preserve the value of money. The reasoning in this case is this. Companies produce products that are just as likely to rise in value (due to rising inflation). Which means companies will make more revenue and profit (even by selling the same amount of products as before). More profits – even more share price rises.
What is wrong with this logic? Opponents can give many reasons why markets could crash at any time. However, we have been hearing all these reasons for years. And (like the statements by Fed officials) fewer and fewer investors are paying attention to them.
One thing is certain for now. A sharp fall will lead to the liquidation of a lot of leveraged margin positions. But a huge amount of other money will rush into the market on corrections. Why? For the same reason, to get rid of the depreciating US dollar.
04.00 Reserve Bank of New Zealand interest rate decision
08.00 UK Consumer Price Index
16.00 Bank of Canada Interest Rate Decision
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