US markets stumbled after the latest data revealed that inflation is standing firm, despite the efforts of the Federal Reserve to tame it.
Prices rose by 3.7% from a year earlier against expectations of 3.6%, although the monthly gain of 0.4% represented a drop from the 0.6% posted in August. While the figures were close to estimates, they nonetheless reignited concerns that the last leg towards reaching the Fed’s 2% target could prove the most difficult, with some core measures apparently refusing to budge. The news also came after a stronger-than-expected reading on producer prices the previous day, adding to the fact that investors currently have more questions than answers.
Treasury yields rose once more as a result, which in turn raised the possibility of one further interest rate hike before the year is out. However, and as mentioned earlier in the week by several Fed officials, elevated bond yields could actually be assisting the drive towards lower inflation, in that they are seen as indicators of borrowing levels for both consumers and businesses and could therefore be crimping demand.
Even so, the vast majority of traders still believe that no further hikes are likely this year, and while the latest news does not move the dial on these expectations, it heightens sensitivity to any data releases which are not in line with estimates.
The developments also play into the “higher for longer” narrative which investors are begrudgingly beginning to accept. The hiking cycle may have reached a peak, but the level of rates are likely to remain in force until such time as inflation is comfortably under control. Releases such as the latest inflation data also push back any possibility of the interest rate cuts which many investors had been anticipating, while the underlying strength of the economy continues to point to one which remains strong enough to withstand the rate pressure.
Investors will now turn their attention to what is happening on the ground, as the third-quarter reporting season begins in earnest today, with updates from the likes of JPMorgan Chase & Co (NYSE:JPM), Wells Fargo & Co (NYSE:WFC) and Citigroup Inc (NYSE:C) in the bank sector, as well as UnitedHealth Group Inc (NYSE:UNH). The banking sector will be of particular interest, with any deterioration in consumer spending or indeed an increase in loan defaults raising potential red flags.
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Even so, hopes are that corporate America will have returned to earnings growth, after several quarters of decline, bolstered by the resilience of the economy and the larger players’ ability to pass on some of the price increases, thus protecting margins. In the meantime, the main indices continue to plough ahead for the year to date despite the current concerns, with the benchmark S&P500 having added 13%, the Nasdaq 30% and the more traditional Dow Jones a more pedestrian 1.5%.
Asian markets were mixed to negative overnight, with China back in the spotlight. Any economic recovery is proving to be uneven at best, with the latest consumer price reading coming in flat and factory-gate prices declining at a lower pace than in previous months. This suggests that deflationary pressures persist, with weak domestic demand adding to the problem.
For the optimists, a further decline in China’s imports and exports for September was at a slower rate, which could signal some signs of stability. In the background, however, investors are still fretting over whether any stimulative measures by the authorities to date have been sufficient to light the fire under a true recovery.
Set against the downbeat sentiment emanating from other global markets, the UK struggled to make any meaningful progress at the open.
Some strength in the oil price overnight provided a small boost to the likes of BP (LSE:BP.) and Shell (LSE:SHEL), while there was a tentative interest in the miners. However, stocks were broadly flat in early exchanges, leaving the FTSE100 ahead by 2.6% in the year to date and some way off the record highs of February.
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The third-quarter reporting season in the UK begins in earnest in a couple of weeks, with the banks being in particular focus. As such, the read across from the US banks over the coming days could well taint sentiment in advance, although the expectation remains that the capital strength, higher levels of shareholder returns and provisions for defaults already made should shelter the UK banks from any short-term shocks.
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