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LGT Navigator: Inflation remains sticky – Fed set for further rate hike – stock markets under pressure

September 14, 2022

The latest inflation data from the US showed that the pace of price increases in August remained higher than expected, thus dashing hopes of an easing trend of inflationary pressures. As this suggests an unchanged aggressive stance by the Federal Reserve, equity markets subsequently sold off, while US capital market rates and the US dollar rose. All eyes will now be on the Fed’s monetary policy decision next week.

Inflation remains sticky – Fed set for further rate hike – stock markets under pressure

In the US, inflationary pressures remain persistent. Hopes in the financial markets that inflation would continue to ease thanks to lower gasoline prices were not fulfilled. For the year, US consumer prices rose by +8.3%, which means that although the inflation rate cooled from +8.5% in the previous month, it was still higher than the consensus forecast of +8.1% by a majority of analysts. The core rate, i.e. excluding energy prices, which determine the headline inflation rate, even climbed from +5.9% to +6.3% in August. Compared with the previous month, the cost of living increased by +0.1% in August (consensus -0.1%). Overall, the Fed will thus have to stick to its more restrictive course, and a new (probably sharp) interest rate hike must be expected next week.

On the stock exchanges in Europe and the US, the stock indices reacted negatively, as expected, to the more stubborn than expected inflation. On Wall Street, the higher-than-expected inflation in the US caused heavy price losses. Technology stocks, which are particularly sensitive to interest rates, were hit particularly hard. The Dow Jones Industrial went out with a daily loss of almost -4% at 31'104.97 points (-3.94%) and the S&P 500 fell -4.32% to 3'932.69 points. On the Nasdaq 100, the indices slumped even more sharply by around -5.5%. At the same time, the yield of ten-year Treasuries rose to 3.42% and the US dollar strengthened. Regarding the interest rate decision of the Federal Reserve scheduled for next Wednesday, we must now probably expect another sharp interest rate increase of 75 basis points.

The stock markets in the Asia-Pacific region also fell sharply in the majority on Wednesday. In Tokyo, the 225-stock Nikkei trades around -2.7% lower and the Japanese yen fell against the US dollar to its lowest level since September 1998. In Hong Kong, the Hang Seng Index loses around -2.5%. In mainland China, the Shanghai Composite trades about -1% lower and the Shenzhen Component loses about -1.5%. The broadest MSCI index for Asia-Pacific shares outside Japan fell by around -2.3% in midweek.

Only short-lived easing of inflation in Germany

German consumer prices rose again in August to +7.9%. Thus, the decline in the previous month from +7.6% in June to +7.5% turned out to be a flash in the pan. Economists and the Bundesbank expect a double-digit inflation rate in the coming months due to rising energy prices. In August 2022, energy prices in Germany were just under +36% above the level of the same month of the previous year, according to calculations by the Federal Statistical Office. Price pressure also intensified for food (+16.6%) for the sixth month in a row.

Moderate decline in inflation in Spain

Inflation in Spain was somewhat stronger than expected in August but declined slightly from the previous month. On an annual basis, the inflation rate was +10.5% compared with an initial estimate of +10.3%, but lower than the +10.7% recorded in July. Compared with the previous month, Spanish consumer prices rose by +0.3%.

Economic expectations for Germany and the eurozone deteriorate further

The economic expectations of analysts and institutional investors deteriorated again in August. The monthly economic barometer calculated by the Center for European Economic Research (ZEW) in Mannheim declined by 6.6 points to minus 61.9 points in September compared with the previous month - the lowest level since October 2008. The consensus had expected a more moderate decline to minus 59.5 points. According to the ZEW, the background to this is the looming energy crisis, which is clouding the outlook for large parts of German industry even more. In addition, there is a more pessimistic assessment of growth prospects in China.

Economic Indicators September 14

MEZ Country Indicator Last period
08:00 UK Consumer price index (August, y/y) +10.1%
08:00 UK Producer price index (August, y/y) +17.1%
09:00 EZ EU Commission President von der Leyen speaks
11:00 EZ Industrial Production (July, m/m) +0.9%
14:30 US Producer Prices (August, m/m) -0.5%
14:30 US Producer Prices (August, y/y) +9.8%


Earnings Calender September 14

Country Company Period
ES Inditex H1
US Starbucks Investor Day


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