The US stock market entered a correction two days ago, with stocks plunging yesterday. Currency pairs containing USD showed rather strong movements yesterday as well. The US inflation report for October is behind such market behavior. Market participants were prepared to see the inflation rate soaring in October. However, they did not expect it to accelerate to 6.2% y/y, the biggest inflation surge in 30 years. Therefore, it comes as no surprise, that markets were volatile yesterday. A few hours later, the greenback strengthened versus its main counterparts, thus maintaining its upward momentum amid the biggest gain in prices. Meanwhile, the US stock indices went down in the wake of a record spike in US inflation and are likely to stay in the downward trend. There is no need to explain what is happening in the stock market now. The fact is that stock indices usually go down when inflation goes up.
There is a direct correlation here. The higher is US inflation, the more likely it is that the quantitative easing program will be winded down faster and interest rates will be raised sooner. In other words, the Federal Reserve is likely to tighten its monetary policy earlier. In recent months, Jerome Powell and Janet Yellen spoke about inflation as temporary. However, not so long ago, Jerome Powell hinted that inflation might remain at a higher level longer than expected and would start slowing down in 2022. It would have been one thing if inflation had started to fall in early 2022 and had not surged to 6.2%. It is a different story when inflation is likely to start going down in the last six months of 2022 and keep growing until then. If so, the Federal Reserve might quicken the pace of QE tapering. Otherwise, it is likely to come under strong market pressure. After all, high inflation should increase risk appetite that could boost investors' profits and save their capital from loosing value. At the same time, the higher inflation is, the better is a chance of earlier monetary policy tightening by the Federal Reserve. Anyway, stock indices may extend gains in the next several months. At the same time, amid gradual QE abandonment, markets and the economy will get back to normal over time. Consequently, markets could also face capital outflow.