The Strategist

Analysts: Accelerated inflation in the US crashed the American stock markets

02/16/2018 - 13:27

Inflation in the US in January exceeded expectations of economists and triggered a new fall in the stock markets. On the eve of the publication of data by the US Department of Labor, the indices showed moderate growth: Stoxx Europe 600 - 0.8%, futures at Dow Jones and S&P 500 - 0.5%. After the appearance of information, American futures quickly fell by 1%, the pan-European index reduced growth to 0.2%. Half an hour after the start of the trading session, the fall, however, was almost won back.

Vlad Lazarenko
Vlad Lazarenko
Because of the sharp reaction of world markets to the growth of inflation expectations in early February, some traders in major world currencies now "believe that this is the most important release of economic data over the past three years," wrote Stephen Innes, head of the trading department in the Asian and Pacific markets of Singapore's Oanda (quote by Bloomberg).

"People will be very attentive to the data on the consumer price index," Ben Laidler, strategist for global stock markets HSBC, told The Wall Street Journal before the publication. According to him, investors will assess the basic inflation particularly carefully, (not taking into account the prices for energy resources and food), the consensus forecast for which is 1.7%. "If the figure turns out right, the market will breathe a sigh of relief, but if it appears higher, it will be under pressure once again," Laidler believed. The cumulative inflation, according to forecasts of economists surveyed by WSJ, was expected at the level of 1,9%.

According to the Ministry of Labor, the basic inflation was 1.8% in annual terms. Compared to December, the basic inflation was 0.3% (0.2% was expected, the same value was in the last month of 2017). The monthly increase in clothing prices by 1.7% was the lowest since 1990.

Market participants say that the publication of data on the growth of salaries in the US in January is among the factors that triggered the fall of the indices a week and a half ago. This indicator was the maximum since 2009. Salaries have barely grown during the post-crisis recovery of the economy until now. This, in turn, was one of the reasons for the discontent of the Americans, which influenced the results of the presidential elections of 2016, but wages did not provoke inflationary pressure. This contributed to the growth of the US stock market, which repeatedly updated historical records in 2017 and early 2018. But the US and many other indexes fell by more than 10% just recently.
Higher inflation can force the Federal Reserve to increase interest rates faster. Its managers forecast three increases in 2018, but Societe Generale analysts are sure that there can be four of them. In this case, the cost of market borrowing will grow, while the government will need to borrow more to finance the budget deficit. It is expected to exceed $ 1 trillion in 2019 due to the consequences of the tax reform proposed by Donald Tramp to increase government spending on infrastructure and the agreement recently reached in the congress on the structure of the budget for the next two years.

The dollar index (the rate to the currencies of the countries - the main US trading partners) increased after the publication of the data of the Ministry of Labor by 0.3%. The yield of 10-year US Treasury bonds rose from 2.82 to 2.862%.

"This is a high figure," Luke Bartholomew, strategist at Aberdeen Standard Investments, commented the level of inflation. "There is a risk that it will pour oil on the sales fire that happened last week."