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Inflation Communication Breakdown
The decision-making process and subsequent market reaction to central bank actions largely dictated financial headlines over the past few weeks. As a recap, the European Central Bank, the US Federal Reserve and the Bank of England all implemented 75 basis point rate hikes. These increases came in an effort to stave off persistently high inflation prints in their regions, including 9.9%, 8.2% and 10.1% annualized rates of inflation in September, respectively. In the weeks following these rate hikes, inflation prints included a more than 10% increase in the euro zone and an 11.1% surge in the UK. In the US, both the producer price and consumer price indexes showed slower growth in October, prompting stocks to rally. That said, strong retail sales in the country showed 1.3% growth in October, suggesting to us that the perceived slowing of economic growth in the US may be skewed via a temporary tempering of energy prices ahead of the election cycle. As it currently stands, benchmark rates sit at 1.5% in the eurozone, a range of 3.75%-4% in the US and at 3% in the UK.
Federal Reserve hikes rates by 75 basis points as expected, though Powell’s commentary prompts jitters
Markets initially perceived the Fed’s statement as dovish and potentially paving the way for a slowdown in rate hikes. Most notably, investors leaned on verbiage that, “In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.” However, Fed Reserve Chairman Jerome Powell’s press conference took a much more hawkish tone, suggesting that there was a “ways to go” on interest rates. Moreover, Powell’s suggestion that the terminal funds rate may need to move higher than its last-projected 4.5%- 4.75% range spooked investors. Despite moving higher following the rate hike, the Dow (-1.6%), S&P 500 (-2.5%) and Nasdaq (-3.4%) all finished lower on decision day.
Emerging market central banks movements
In emerging markets, Chile (50 basis points), Colombia (100 basis points), Indonesia (50 basis points), Israel (75 basis points), Korea (50 basis points), the Philippines (75 basis points), Romania (50 basis points) and Vietnam (100 basis points) also raised interest rates in recent weeks. On the other hand, Turkey instituted a 150-basis point rate cut. Plans for paths forward vary and range from Colombia and Korea’s expectations for additional rate hikes to Chile’s estimation that it has reached its rate hike peak with intentions to keep rates at these elevated levels until inflation is sufficiently under control. All data considered, the CBOE Volatility Index sank from the mid-30s in October to the mid-20s in November as investors come to terms with the inflationary environment and gain more clarity on the path of rate hikes moving forward.
While the annual inflation rate currently sits at 7.7% in the US, we find it important to remember that the figure remains relatively high no matter how you look at it. Though the October reading decelerated from previous months, there is little known as to where inflation is going to settle. In fact, there are still factors which will likely prevent inflation from falling back to the target of 2% any time soon.
Past performance does not guarantee and is not a reliable indicator of future results.
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