It is Too Hot in the Markets Today

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Markets were in for a rollercoaster ride today as the US Federal Reserve’s preferred measure of inflation, the Personal Consumption Expenditure (PCE) Price Index, soared to its highest level. This was accompanied by solid consumer spending data that saw retail sales surpass expectations and grow faster this year.

The surge in inflation and consumption fueled expectations that the Fed may have to take more aggressive steps to rein in prices, leading investors to dump stocks and bonds and causing yields on Treasury notes. Despite this sell-off, analysts believe inflation will remain contained thanks to weak wage growth, falling energy prices, and high unemployment.

The repricing of rate hike expectations was not limited to the US Federal Reserve. The European Central Bank (ECB) saw its rate hike expectations ratcheted up, triggering a global bond sell-off led by a rise in front-end yields and flattening yield curves.

European and US equity markets ended the week in a sea of red as investors panicked over the prospects of higher inflation. The S&P 500 recorded its worst week in two months.

The US dollar strengthened significantly, with the Japanese yen and Australian dollar being the two major losers. The AUD started the new week at 0.6733, while the NZD was only slightly behind at 0.6165.

Friday saw a round of solid US data releases confirming the strength of the American labour market and retail sector.

According to Business Research and Insight forum, “The accompanying inflation report also printed higher than expected, the core PCE deflator jumped 0.6% mom sa, its highest reading since July 2022. The annual increase was 4.7%, four-tenths ahead of market expectations as the data showed upward revisions.”

All signs point towards a strong recovery for the US economy throughout 2023, but it remains to be seen what effect inflation will have on markets going forward. With most analysts agreeing that inflation will remain contained, investors should have confidence that prices will remain stable despite any short-term volatility caused by rising yields or exchange rate movements.

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