The Fed cools the economy but investments overheat in the United States: has inflation reached its ceiling?

Equities rallied strongly on the New York market after their June low as investors They bet inflation has peakedalthough the Federal Reserve makes it clear that its campaign to cool the US economy by raising interest rates is not over.

Higher interest rates are generally considered negative for stock prices as they increase costs for businesses.

A chorus of Fed officials recently insisted that the US central bank it will have to increase the tariffs further rate to curb stubbornly high inflation.

However, the S&P 500 index is up, recording Profits in the last three weeks and up by more than 12% from the low of 16 June.

Rather than worrying that a growing economy might encourage the Fed to hike rates more aggressively, it appears that investors are choosing to focus on easing recession concerns, particularly as many expect the pace of inflation to slow down.

A major test of this thinking was expected on Wednesday, with the release of the latest consumer price index data.

The report showed it headline inflation slowed in July and it increased by 8.5% over the previous year, compared to the pace of 9.1% in June.

Fear of a recession

In recent weeks, a series of quarterly corporate earnings reports have shown better-than-expected results, giving investors more momentum.

On Friday, new data showed that US companies continued hiring new employees at a solid pace last month, a sign that the economy was proving resilient to rising interest rates.

But it could also be seen as a sign the Fed needs do more to cool the economy and lower pricesincreasing the risk that higher rates could push the economy into a recession.

“I think the ‘peak inflation’ argument has become so ingrained in the psyche of the market that the employment report has been interpreted more as a fight against the recession,” said David Donabedian, chief investment officer of CIBC Private Wealth. Management.

Although investors’ expectations of where the Fed’s main interest rate will be at the end of the year have increased this month, they still expect the increase to stop next year. And even more, they predict that the Federal Reserve will have to reduce them a bit.

This is a change from expectations in June, when investors were more aligned with the Fed’s forecasts that rate hikes would continue until 2023.

Even lower rates?

The Fed could cut rates next year, in the optimistic case, if it turns out that inflation has been controlled without sinking the economy and that a stricter policy is no longer needed.

A household survey released Monday by the Federal Reserve Bank of New York showed a steep decline in consumer inflation expectations, supporting the view that an inflationary spiral is not taking hold.

But Donabedian warned that investors may be too optimistic even if inflation falls from current levels. A leading inflation rate of 8.5 percent is well above the Fed’s policy target of 2%.

With such optimism underpinning stock prices, any shock showing accelerating inflation could quickly pull financial markets down.

As a result, said Alan McKnight, Regions Bank’s chief investment officer, he is “less bullish” than the financial markets appear.

Confusion in the markets

Other factors may explain the seemingly bewildering market moves.

August is typically a quiet month for stocks as trading volumes decline as traders move away from their summer vacation desks, making prices more susceptible to wild moves.

Trading volume in a $ 375 billion exchange-traded fund that tracks the S&P 500, which is traded under the ticker SPY, fell to its lowest level from November past.

There has also recently been a resurgence of the feverish trading of “meme” titles such as cinema operator AMC Entertainment, up more than 60 percent this month, and Bed Bath & Beyond, up more than 120 percent this month. month.

The combination of these business models has made it even more difficult to interpret the performance of financial markets, which are already struggling with rising inflation, rising interest rates and growing recession concerns.

“It has been an extraordinary business environment for many reasons, right?” Said Ben Snider, senior market strategist at Goldman Sachs. “So it’s hard to say that something is unusual or normal, because recently everything has been unusual.”

The S&P 500 has fallen lower in the past few days, but the declines have been modest compared to last month’s gains.

Source: The New York Times

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