Investors' hopes that the US inflation rate has slowed down collapsed after the publication of the latest data on consumer inflation on Tuesday, which has continued to rise steadily since this spring.
Based on the presented data, America's consumer inflation in annual terms should have declined from 5.0% to 4.9%, but it rose to 5.4%. As for monthly terms, the figure is expected to fall from May's 0.6% to June's 0.5%, but this also did not happen. The monthly inflation surged to 0.9%. At the same time, core consumer inflation rose stronger than expected by 4.5% yoy against 4.0% and 3.8% in May. In June, the indicator showed noticeable growth higher than the forecast – by 0.9% against 0.4% and a rise of 0.7% in May. Overall, US consumer inflation rose to mid-2008 levels for the first time in 13 years.
How did the markets react to the strong inflation growth?
Global stock indices declined, showing justified rising concerns that the words said by Fed members about the temporary nature of the inflation growth may turn out to be wrong. We believe that inflation will continue to rise as long as there are unprecedented measures of financial support for the population of the country, which has caused the growth of the population's demand for goods and services but keeps the employment values low. All this is happening against the background of high taxes and the reluctance of the low-paid population to look for work, preferring to rely on benefits.
In this situation, the Fed will have to reluctantly resort to tightening monetary policy. First, it should start reducing the volume of government bond buybacks. It can be recalled that the regulator is currently buying back assets for $ 60 billion a month. After that, it will start raising interest rates next year, and not in 2023, as it was supposed to be.
The US regulator's actions will become a common signal for the world Central Banks, which will also gradually tighten monetary policy after America. But in this situation, the Fed will have control, which means that there will most likely be a global strengthening of the US dollar amid sales of Treasuries, which have started again, and a noticeable downward correction in stock indices.
However, another important factor that will influence all these events should also be considered – the COVID-19 situation. Doctors warn that this infection has stuck to a person for a long time, which means that outbreaks in some or other places on the planet will irritate investors, forcing them to react.
What can be expected?
We believe that if the US inflation rate does not slow down by autumn, instead a small downward correction is seen, Fed Chairman J. Powell can be expected to announce during his speech in Jackson Hole at the end of August a change in the monetary exchange rate and the beginning of reducing the volume of redemption of Treasuries in December this year.
As for the possible current dynamics of the markets, it will be entirely influenced by the topic of high inflation in the United States. The focus will be on the publication of data on US industrial inflation and Powell's speech to Congress. In addition, the Central Bank of Canada will have a meeting on monetary policy, followed by the speech of the head of the bank. The values of American crude oil reserves for last week will also be released.
Forecast of the day:
The EUR/USD pair is trading near a nearly four-month low of 1.1700. If the manufacturing inflation data shows growth, and Powell talks about the topic of a change in the monetary exchange rate in his speech in Congress, then this will put pressure on the pair, allowing it to further decline to the level of 1.1700.
After the Bank of Canada meeting, the USD/CAD pair may continue to rise in view of maintaining the previous course of monetary policy and the absence of any signals for promising changes in this policy. The pressure of the US dollar amid the raised topic of possibly earlier tightening of monetary policy will support the pair, which is highly likely to continue to rise first to the level of 1.2590, and then to 1.2680.