Market Flash: US inflation surprises on the upside – investment markets fall sharply

14 September 2022

On Tuesday 13 September 2022, US equity markets suffered some of their worst daily losses in more than two years – albeit falling back to levels seen just last week – as inflation data for August came in higher-than-expected, raising concerns that the path towards a more manageable level of inflation may take longer.

Investors and policymakers had been hoping that the series of rate hikes by the US Federal Reserve (the Fed) so far in 2022 would continue to slow inflation, and while August’s annual headline inflation number fell to 8.3% from 8.5% in July, it was higher than many had forecast.

The x-axis (horizontal) shows years, starting at 2011 and ending at mid-2022. The y-axis (vertical) shows numbers from -4 at the bottom and going up by 2 finishing at 10 at the top.

A line marked 'Target Level' runs horizontally across the graph at value 2.

A second line, marked 'Headline CPI' also starts at value 2. That line trends upwards to a high of 4 in late 2011, it then falls to just below 2 in mid-2012. For the next two years it moves up and down between approximately 1 and a little over 2 until mid-2014 when it falls to approximately zero. The line stays around zero until mid-2015 when it begins a slow upward trend to a peak of approximately 3 at the 2017 mark. There is a small decline to just below 2 then another slow incline to another peak of approximately 3 in mid-2018. The line slowly drops to below 2 then rises to a peak just above 2 at the 2020 mark. In early 2020 there is a quick drop to zero in the first half of 2020 followed by a small climb and a flattening at approximately 1. This is steady until the beginning of 2021 when there is a steep incline to approximately 5, a short flat point, then another steep incline to a high of approximately 9 in the first half of 2022. The line begins to drop just before it finishes just above 8 in approximately mid-2022.

What happened in markets

For the day, the S&P 500 Index fell by more than 4%, while the tech-heavy NASDAQ 100 Index fell by more than 5%. It was the worst daily decline for the two major benchmarks since June 2020. Furthermore, the session erased nearly all the gains share markets had made over the month to date. In sector performance, all 11 of the S&P 500 Index sectors ended in the red, with communication services, information technology and consumer discretionary the worst performing.

Bond markets had a tough session too, with bond yields higher across the board. The yield on the benchmark US 10-year government bond hit 3.46%, while the two-year equivalent rose to its highest level in nearly 15 years. 

The move in interest rate markets means a 75 basis point hike by the Fed at its next meeting on 21 September 2022 is all but a sure thing, with a small probability the Fed may even consider a 100 basis point move.

No respite in inflation even as oil continues to decline

Many had hoped that the sharp two-month decline in gas prices would finally help cool inflation. 

According to the American Automobile Association, the price of a gallon of gas was US$3.70 on 12 September 2022, down from above $5 in June 2022. However, Tuesday’s (13 September 2022) data underscored continued pressure on households’ budgets, with rent, food and healthcare costs all still rising, doing little to offset the relief consumers were feeling at the fuel pump.

Core inflation, which strips out volatile food and energy prices, rose 0.3% over the month and 6.3% over the past 12 months. It was the first year-on-year increase in the core inflation number since March 2022.

A message from our Investment Specialist, Ray Jack, Credit Analyst

“US core CPI and headline CPI was above forecasts but off from their recent highs, with the chief causes mainly strong wage growth and housing-related inflation. The US interest rate market quickly moved to price in more Fed hikes – two-year Fed futures rose 29 basis points to 4.29%.

This will likely have a flow-on impact to New Zealand’s interest rates, pushing up local wholesale interest rates. It’s clear now that the Fed will have to risk a recession via a jump in unemployment to tame wage inflation, which suggests the hard landing probability is rising.”

The challenges central banks face

The report underscores the challenges that the worlds’ central banks face in taming the current levels of elevated inflation.

In a supply-side driven inflationary environment, central banks’ main tool of raising borrowing costs to dampen demand is diminished because much of the inflation is driven by capacity/supply constraints.

Furthermore, what we have seen of late is that household balance sheets remain robust thanks to a tight labour market, meaning they have been able to withstand the rise in prices.

A challenging year continues – but our investment approach remains robust

The falls in markets continue what has been a challenging year for investing, with both equity markets and bond prices falling in tandem. That said, we had expected markets to remain volatile and have been positioned accordingly, using the rally in markets in July and early August 2022 to scale back our position in international equities to neutral.

It’s also worth noting that despite the falls, the S&P 500 Index is only back to levels seen early last week (even though the losses over the year as a whole are more substantial).

We understand that no one likes seeing their investment balance going backwards, but we continue to reiterate the importance of focusing on the long term, and remind you of just how well markets have performed over the last few years. 

Furthermore, our philosophy as an investment manager is unchanged: we continue to invest in well diversified, high-quality and highly-liquid investments that are positioned to weather the ups and downs of investing.

As always, please do not hesitate to pick up the phone and have a chat with your Private Banker, who’ll be happy to provide you with more perspective and discuss your situation.

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Important information

This information is issued by ANZ Bank New Zealand Limited (ANZ). The information is current as at 14 September, 2022 and is subject to change. 

This document is for information purposes only and is not to be construed as advice. Although all the information in this document is obtained in good faith from sources believed to be reliable, no representation of warranty, express or implied is made as to its accuracy, completeness or suitability for your intended use. To the extent permitted by law, ANZ does not accept any responsibility or liability for any direct or indirect loss or damage arising from your use of this information. 

Past performance is not indicative of future performance. The actual performance any given investor realises will depend on many things, is not guaranteed and may be negative as well as positive.