Markets reverse course on Fed’s inflation narrative

 

Stocks fell on Wednesday after Federal Reserve Chair Jerome Powell said inflation was still too high and therefore the central bank has further to go in raising interest rates.

The Fed implemented another 75 basis points rate increase Wednesday afternoon and Powell said in a press conference that its inflation fight was far from done.

Powell commented “We still have some ways to go, and incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected.” Powell also highlighted a still tight labour market and a resilient consumer underpinned by strong household balance sheets.

Markets struggled to interpret the central bank’s stance, with stocks jumping after the statement was released, then sinking after Powell warned in his press conference that rates would top out at a higher “terminal” level.

The Dow Jones Industrial Average fell 1.6 per cent, eating away at its significant October rebound and after Wednesday’s losses, the 30-stock index is down more than 11 per cent for the year. The S&P 500 dropped 2.5 per cent and the Nasdaq Composite tumbled 3.4 per cent.

Behind the inflationary numbers is a story of rising prices not rising wages. Today’s price inflation is more a product of profits than wages. Broad-based inflation is normally a labour-cost problem. The rule of thumb is that labour costs are around 70 per cent of the price of a developed economy’s consumer prices.

In the US wages have been rising but prices have been rising faster, so real wage growth is catastrophically negative. This is far removed from the 1970s-style wage price spiral that drove inflation decades ago.

This is the current inflation story. Companies have passed higher costs on to customers. But they have also taken advantage of circumstances to expand profit margins – those circumstances include strong post-pandemic household balance sheets and increased borrowing to offset the sorry state of real wages. The resulting resilience in demand has given companies the confidence to raise prices faster than costs.

But any softening of demand can quickly turn pricing power on its head. The slowing demand for consumer durable goods this year turned the fastest ever inflation in prices for those products into the most dramatic deflation since data started being collected on them in the 1950s. Companies it appears are walking a tightrope when it comes to consumer demand and pricing

Across the sectors there was no leadership. The only area of strength was with Chinese related companies which extended their rally on hopes of a reversal of China’s zero COVID policy

Currencies

One Australian dollar at 7:25 AM is weaker compared to the US dollar yesterday, buying 63.58 US cents (Wed: 63.93 US cents), 55.82 Pence Sterling, 93.99 Yen and 64.72 Euro cents.

Commodities

Iron ore futures are pointing to a 0.8 per cent gain.

Gold fell $11.00 or 0.7 per cent to US$1639 an ounce.

Silver dropped $0.44 or 2.2 per cent to US$19.23 an ounce.

Copper lost $3.35 or almost 1 per cent to US$343.90 a pound.

Oil added $0.84 or almost 1 per cent to US$89.21 a barrel.

Futures

The SPI futures are pointing to a 1.6 per cent fall.

Figures around the globe

Across the Atlantic, European markets closed lower. Paris fell 0.8 per cent, Frankfurt lost 0.6 per cent and London’s FTSE closed 0.6 per cent lower.

In Asian markets, Tokyo’s Nikkei fell 0.1 per cent, Hong Kong’s Hang Seng jumped 2.4 per cent and China’s Shanghai Composite closed 1.2 per cent higher.

Yesterday the Australian sharemarket gained 0.1 per cent to close at 6987.

Ex-dividends

CD Private Equity I (ASX:CD1) is paying 14 cents unfranked
CD Private Equity II (ASX:CD2) is paying 28 cents unfranked
CD Private Equity III (ASX:CD3) is paying 21 cents unfranked
EZZ Life Science (ASX:EZZ) is paying 0.45 cents fully franked
Qualitas Real Estate Income Fund (ASX:QRI) is paying 0.951 cents unfranked

Dividends payable

Arena REIT (ASX:ARF)
Elanor Commercial Property Fund (ASX:ECF)
K&S Corp (ASX:KSC)

Sources: Bloomberg, FactSet, IRESS, TradingView, UBS, Bourse Data, Trading Economics, CoinMarketCap.
Copyright 2022 – Finance News Network

Source: Finance News Network