US core inflation rose by more than expected, paving the way for a more hawkish Federal Reserve. Risk assets fell sharply lower, and the USD rallied.
· Nasdaq falls over 5% after hotter-than-expected US CPI
· USD/JPY eases back from 145.00 on BoJ intervention chatter
· GBP/USD falls after UK inflation unexpectedly fell to 9.9%
After a solid start in Europe yesterday, the mood soon soured, and stocks tumbled from 2-week highs to end the day firmly in the red. Hotter-than-expected US inflation data caught the market off guard, sending stocks across the globe sharply lower.
The Nasdaq fell over 5% in its worst one-day performance since the start of the pandemic, and the S&P500 posted its biggest loss in two years. The weakness on Wall Street is setting Europe up for a weaker start. The DAX is heading for a 0.5% fall on the open but holds over 13000.
US CPI
The keenly awaited inflation data showed that consumer prices not only fell by less than expected to 8.3%, but core CPI rose by more than expected to 6.3%. The data suggests that inflation is much more embedded in the US economy than initially thought. Optimism that had been growing in the market that inflation was on a strong downward path was seriously misplaced. Instead, this data paves the way for more aggressive rate hikes from the Federal Reserve.
The market is no longer considering that there may be a possibility of a 50-basis point rate hike next week. Instead, investors have started fretting over a potential 100 basis point hike. The data will concern the Fed and supports the hawkish tone we heard from Fed speakers at the end of last week. Still, the most likely outcome will be a 75-basis point hike next week which is 88% priced in.
As mentioned, US stocks tumbled yesterday, and the USD shot higher, reversing losses from recent sessions.
USD/JPY rallied 1.2%, reaching 145.00 before falling back overnight after BoJ intervention chatter, which helped support the yen. The pair trades at 143.60 at the time of writing.
UK CPI
UK consumer prices unexpectedly fell to 9.9% YoY in August, down from 10.1% in July and below the 10.2% forecast. The slight cooling in inflation was down to a fall in petrol prices. The data will take some (but not much) pressure off the Bank of England as it battles to bring inflation back towards its 2% inflation target.
The data could fuel speculation that UK inflation has already peaked. Particularly as Liz Truss’ energy support package should also prevent a further spike in inflation as energy bills are set to remain approximately at their current levels.
The BoE is due to meet next week to discuss monetary policy and is expected to raise interest rates by 50 or possibly 75 basis points.
GBP/USD pared earlier gains and looks vulnerable below 1.15. Meanwhile, the FTSE is set to open 0.6% lower.
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