It’s a fun game of cat and mouse they play, isn’t it?
I wrote a Piece A few months ago the “What’s New?” It started with the question. Shares They rose to their best two-day gain since 2020 following renewed optimism that a Federal Reserve pivot could be imminent.
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Well, Isaac Newton’s third law of motion states that for every action there is an equal and opposite reaction. Mr Newton’s laws seem to extend to the stock market, which fluctuates seemingly uniformly throughout the year.
This week has brought a reversal of that upward momentum, with markets pulling back after hawkish comments from central banks around the world. But what does that mean, and where does that leave us?
Inflation data beat expectations in the US, UK and Europe
It’s been a big week for the only thing that seems to matter to the markets lately – inflammation numbers.
Stock market initially high After US inflation came in at 7.1% on Tuesday, down from 7.7% in the previous month, beating expectations of 7.3%. This is the lowest level since 2021 and the stock market is not wasting time. It’s from the races, with S&P 500 It rose 3% in the opening hours.
But Jerome Powell and the funny police, known as the Federal Reserve, decided to shut down the party. Powell said the central bank would need “substantial additional evidence” that inflation is easing, adding that “my view and the view of my colleagues is that it will take some time… to understand that we have a long way to go to return to price stability”.
The market responded, collapsing. The S&P 500 gave up most of its gains, falling below $3900.
Europe is following the same path
Even worse was the ECB, which followed the central bank in hiking by 50 bps. While easing inflation numbers, it has committed to raising rates to “significant”, “sustainable pace” and “adequately restrained” levels.
However the ECB rate is only 2%, which is way down south to us The ratio is 4.25- 4.5%. America is doing well because of this Ahead of the UK and EuropeMeanwhile, states are also faring better economically. The energy crisis is suffocating Europe Hard, as Russia It continues its war on Ukraine, while a relentless dollar also affects the eurozone.
However, the dollar has softened recently as inflation shows signs of being contained.
Does this mean going forward?
However, the labor market is still tight. The fact is, inflation is still high, and it’s hard to imagine a situation where unemployment is contained without rising.
The Federal Reserve knows this, and they know inflation is far from over. The 1970s are important in their minds, when hiking rates controlled inflation that only returned to higher levels after the foot was taken off the gas. In fact, it happened three times.
The message at this point is clear: the Fed and other central banks are doing everything they can to reduce inflation. Remember, expectations of inflation fuel further inflation. As long as demand and spending are restrained – and some employment weakness is felt – this level of inflation will continue.
The market saw the inflation numbers and Powell and the gang decided that was enough to soften their language a bit, especially as recessionary fears increased. But Powell’s rhetoric on Wednesday was clear to investors who believe the Fed will abandon its fight against high prices as job losses mount and the economy heads into recession. The market believed him and that’s why the price went down.
The next CPI reading is only 27 days away.