Inflation in the United States has hit financial markets

14.09.2022 10:46|Conotoxia Ltd Analyst Team

Yesterday's presentation of inflation data in the United States shook financial markets. Investors, looking by the reaction in many markets, seemed to expect inflation to fall faster than the estimation presented. The markets were shaken.

US inflation - a powerful blow to financial markets

The August consumer price index report showed that inflation rose 0.1 percent on a monthly basis, despite forecasts for a 0.1 percent decline, while the annual rate of consumer inflation fell less than expected in August to 8.3 percent (consensus 8.1 percent). The higher-than-expected U.S. inflation reading and slower pace of decline may have given rise to speculation that the Fed may deliver a larger interest rate hike than 75 bps. The game may now be on for a 100 bp hike next week.

At the end of Tuesday's session, the Dow Jones index was down 3.94 percent, the S&P 500 down 4.32 percent, and the Nasdaq Composite down 5.16 percent. All three major indexes broke a four-day streak of gains and posted their biggest one-day decline in more than two years. All sectors in the S&P index ended the session in negative territory, with communications services, technology and consumer products falling more than 5 percent. 

Bitcoin had already fallen at one point, in a move initiated after the US data, to levels below $20000. This could mean a drop of more than 10 percent. The EUR/USD pair price, in turn, retreated below parity, recording a cumulative drop of more than 2 percent after the data. Such large changes in many markets could be fears of faster and larger interest rate hikes in the US.

inflation in the united states

Source: Conotoxia MT5, US100 m30

How is the Fed's action priced in?

According to the interest rate market, the chances of a 100bp hike on September 21 have risen to 34 percent. Previously, the market had not considered such a large US interest rate hike at all, and was considering a rate hike between 50 and 75 bp. The current pricing could lead to an increase in the range for the federal funds rate to between 3.25 and 3.5 percent, which in turn could mean that the market is pricing the end of the hike cycle no longer in the 3.9 percent region, but in the 4.2 percent region, which could also contribute to the strengthening of the USD. In the bond market, on the other hand, the yield on 2-year U.S. Treasury securities rose to its highest level since 2007, exceeding 3.7 percent. In the past, the level of 2-year bonds may have coincided with the target level of the federal funds rate for the hike cycle.

current inflation rate in us

Source: Conotoxia MT5, USDIndex D1

Yen struggles against dollar strength

It seems that this morning only the Japanese yen is trying to fight the strength of the USD. This  might have to do with further news of possible intervention. Japan's Finance Minister Shunichi Suzuki said on Wednesday that currency intervention is among the options to combat the decline of the country's currency, the BBN news service reported. 

"We are talking about taking all available options, so it is right to think that way," he said. - Suzuki told reporters after being asked if currency intervention in the form of yen buying was on the table. "Recent moves have been quick and one-sided, and we are very concerned. If such moves continue, we must respond, and we are not ruling out any options." - He added.

A break of the 145 level by USD/JPY would   lead to intervention by Japanese authorities, David Forrester, senior FX strategist at Credit Agricole CIB, told Bloomberg. The problem facing the Ministry of Finance in the event of any FX intervention is that the upward movement of USD/JPY reflects the divergence between the Fed and BOJ, so the impact of any intervention would only be temporary, the Credit Agricole representative added.

Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Conotoxia investment service)

Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.

 

 

 

Like the article?
Share it with friends!


See also:

Sept 13, 2022 10:30 am

US inflation 2022 - investors focused on data. Dollar, indexes, cryptocurrencies in the spotlight

Sept 12, 2022 3:21 pm

Value stocks and dividend companies with potential

Sept 12, 2022 10:06 am

Euro gains strength with Ukrainian military offensive?

Sept 9, 2022 12:39 pm

Changes in Shopify's management team - how did they affect the stock price?

Sept 9, 2022 10:06 am

Fears of intervention targeting the Japanese yen

Sept 8, 2022 3:16 pm

Apple presents new products. Does it affect the stock price?

76.23% 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.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76.23% 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.
Trading on CFDs is provided by Conotoxia Ltd. (CySEC no.336/17), which has the right to use the Conotoxia trademark.