US inflation continues to accelerate

By 14/07/2021News

Gold  1813,395

EURUSD   1,1785

DJIA  34722,50

OIL.WTI  75,055

DAX   15774,50

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

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

Important Notes on This Publication:

The content of this publication is for general information purposes only. In this context, it is neither an individual investment recommendation or advice nor an offer to purchase or sell securities or other financial products. The content in question and all the information contained therein do not in any way replace individual investor- or investment-oriented advice. No reliable forecast or indication for the future is possible with respect to any presentation or information on the present or past performance of the relevant underlying assets. All information and data presented in this publication are based on reliable sources. However, Bernstein Bank does not guarantee that the information and data contained in this publication is up-to-date, correct and complete. Securities traded on the financial markets are subject to price fluctuations. A contract for difference (CFD) is also a financial instrument with leverage effect. Against this backdrop, CFD trading involves a high risk up to the point of total loss and may not be suitable for all investors. Therefore, make sure that you have fully understood all the correlating risks. If necessary, ask for independent advice.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 83% of retail investor accounts lose money when trading CFDs with this provider.
You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.