A 1,300-point drop in Dow Jones Industrial Average. A selloff in bonds that sends Treasury yields higher. Signs of panic selling on Wall Street. And a dollar sore to some of its highest levels in two decades. All in a single day.
Thursday’s price action offers “elements” of what may still be in store given the risk that US inflation keeps rising even after the Federal Reserve delivers interest rate hikes, said FHN Financial’s Jim Vogel. And it’s a chance that can’t be ignored, he said.
Though many in financial markets suspect US inflation has already peaked, the risk is that it hasn’t, creating room for further volatility across assets. Congestion at global ports, which act as the conduit of trade, has only worsened since last year, according to RBC Capital Markets. And in a rude surprise for investors on Thursday, the Bank of England put out both a double-digit inflation outlook for the UK, plus the prospect of sharply slower economic growth.
Pound drops to nearly 2-year low, despite Bank of England lifting key rate to 1%
“There’s a risk that inflation continues to surge ahead and it would come from compounded labor-market pressures that continue to come in, along with supply shortages and logistics issues,” Vogel, a Memphis-based executive vice president, said via phone.
Why the stock-market plunge is partly due to bad news on the inflation front
While the range of professional estimates for the US consumer-price index, excluding food and energy, is 2% to 3.5% for next year, derivatives traders see core CPI coming in closer to 4.1% in 2023. The chart below shows where derivatives traders now see the gauge going, as reflected in the blue line, versus where they expected it to be in March.
“While we are in the lower-inflation camp, you can’t brush aside the risk that inflation may go higher,” FHN’s Vogel said via phone. “There’s real potential for that.” While China’s COVID-19 shutdowns are one issue, Russia’s war on Ukraine has the potential to drive up the prices of everything from raw materials to goods and labor, he said.
Generally speaking, most forecasters in the US are optimistic that inflation currently running at its highest level in four decades will eventually ease off. Economists surveyed by The Wall Street Journal in April saw another measure which also excludes food and energy, known as the core PCE, falling to 2.8% in 2023 from 4.3% this year, on average. They also saw the annual headline rate of the consumer-price index falling to 2.9% by December 2023 from 7.5% this June.
Thursday’s roller-coaster ride in financial markets included a more than 1,300-point drop in Dow Jones Industrial Average DJIA during the final hour of trading. Treasury yields were higher, with rates on 7- to 30-year maturities all trading above 3%. The ICE US Dollar Index DXY rose 1.2% to its highest levels since the second half of 2002.
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Credit: www.marketwatch.com /