The 0.2% miss that cost the equity market 5%
The biggest issue in markets at the moment is the worldwide central bank battle against inflation. Yesterday we had the most recent influential data point here. In the US, month on month consumer price inflation went up 0.1% versus an expected fall of 0.1%. This 0.2% differential led to a 5% fall in the Nasdaq and a 4% fall in the S&P 500.
Why did such a small miss in one month-on-month inflation data point lead to such a dramatic market reaction?
- The rally in equity markets from late June to mid-August was fuelled by hopes that central banks would not raise rates as fast as previously thought against a background of slowing global growth. Higher than expected inflation means it is very hard for central banks not to raise rates to combat persistent inflation.
- On the back of this most recent data point the market has priced a 100% chance of a 0.75% interest rate increase at the next Fed Open Market Committee (FOMC) meeting on 21st September. The market has started to also price a small chance of a 1% rate rise.
- Recent monthly data points had been signalling slowing inflation but the change from the prior month reading of 0% to an increase of 0.1% shows a reacceleration. As is so often in finance the potential directional trend change is very important.
Thoughts based on market moves:
- The magnitude of the market reaction shows how pivotal the inflation debate is right now. One month-on-month data point would not normally have this much impact.
- Being a central banker is a very tough job at the moment.
We remain well diversified across equities and alternative assets. Persistent inflation and future expected rate rises are destructive for fixed interest investments and we continue to advocate no exposure here which is a big differentiator versus our peers. This has been a conviction call that has added value and that we continue to stand by.
Opinions constitute our judgement as of this date and are subject to change without warning. With investing, your capital is at risk.