Last week’s US inflation number came in higher than expected and sparked a volatile reaction. The S&P 500 fell sharply and the dollar jumped along with the 10-year US Treasury yield. Optimism that price pressure was cooling was immediately put on hold. Headline inflation didn’t look too bad but that includes the price of oil which is falling fast. The Fed watches Core inflation (excludes oil) and that was up 0.6% over a month. U.S. 10 Year Treasury Note has continued higher this week hitting 3.6% earlier today (Tuesday) for the first time since 2011.
Interest rates are trending higher and central banks are quite possibly driving their economies closer to recession. This coming Wednesday the US Federal Reserve meeting will command the market’s attention as investors place their bets on a further 0.75% hike (highest expectation) or even 1% (lower expectation). Looking further out Goldman Sachs raised their expectation for a rate increase in December to 0.5% from 0.25% basis points.
Many commentators are worried that the Fed, who were late to see persistent inflation coming (remember “transitory”?), run the risk of overtightening; according to economist Danielle DiMartino Booth (@DiMartinoBooth) the Fed are “hanging their hat” on the lagging indicators of housing and employment which both seem resilient right now.
Deutsche Bank and others reminded us last week that US interest rates have tended to peak above inflation before a FED tightening cycle ends and currently there’s quite a gap between the two so if history were to repeat, rates have a way to go.
Joe Biden doesn’t seem too worried.. “Unemployment is low, jobs are up, manufacturing is good. So I think we’re gonna be fine.”
UK inflation stayed high at 9.9% in August but down from 10.1% in July. Core inflation though registered 6.3% up from 6.2%.
As well as the Fed there are several other policy meetings from central banks this week including the Bank of England and Bank of Japan.
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