Even after the market meltdown, investors are still making two implausible assumptions about the next six months, this economist says

Not for the first time, inflation figures surprised the market. The bad news was the S&P 500 SPX,
saw the largest one-day decline in two years, down 4.2%. The good news is that if you check your 401(k), you won’t be back to last week’s level until the early hours of Wednesday.

A month of data is only a month of data, and there are still those who believe that the Fed will stop the rate hike campaign in the not-too-distant future.

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“With inflation expectations almost back to normal levels and mounting disinflationary pressures showing up everywhere except the official CPI, we still expect both headline and core inflation to fall faster over the next 12 months than officials currently believe,” he said. Paul Ashworth, chief US economist at Capital Economics. “The spindle is not dead yet.”

But what a rotten month of data it was. The first surprise of the day was that core CPI was much higher than forecast, and two methods of dividing the numbers by regional Feds carried even more bad news. The Atlanta Fed’s CPI gauge for sticky prices rose from 5.8% year-over-year to 6.1%. Remember, that’s a weighted basket of prices meant to change slowly (think menus). Meanwhile, the Cleveland Fed’s median CPI accelerated from 6.3% to 6.7%.

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If you use the old rule of thumb that the Fed should raise interest rates above the core rate of inflation – and remember, that particular saw is on the Fed’s own website! – then the market still greatly underestimates how high the rates will have to go. Even after Tuesday’s inflation surprise, fed fund futures imply a final yield around 4.25%.

Anatole Kaletsky, the chairman and chief economist of Gavekal, calculates that even if price increases come to a complete halt now, core inflation would still be 4.3% in December and nominal interest rates at 6.2%. If core inflation continues to rise 0.56% as it did in August, it will reach 6.6% in December – and if inflation rises at the same rate as recorded by the median CPI over the past three months, that core figure will reach 7.2 to achieve. % by Dec.

“Many investors expect the US economy to plunge into a deep recession and the Fed to react by panicking and abandoning its inflation target. Both things could eventually happen, but neither is remotely plausible within the next six months or so,” he says.

After all, the most recent data on US activity has become stronger. “With inflation and labor market reports still clearly pointing to overheating, the Fed has no excuse to pause, let alone talk about easing in the future,” Kaletsky said.

Read:Annual rate of UK house price growth doubles to 15.5% in one month | Housing market

He predicts that Fed Funds interest rates will hit 4.5% by Christmas, core inflation will be around 6.5% and the US economy will still show no signs of recession.

“In this case, it’s hard to imagine why 10-year bond yields should trade below 4%, and it’s highly likely that the yield curve could divest, pushing long-term bond yields toward 5%. go,” he said. He didn’t come up with a stock market forecast, but suffice it to say that if he’s right about bonds, stocks would see more days like Tuesday.

The market

US stock futures ES00,

were a little higher. The dollar DXY,
lower, and the yield on the 10-year Treasury TMUBMUSD10Y,
rose to 3.46%.

the buzz

Producer prices fell 0.1% in August, slowing the year-on-year rate from 9.8% to 8.7%.

The UK saw inflation slightly below expectations, falling from 10.1% to 9.9% in August.

The Bank of Japan has been monitoring the foreign exchange market, the Nikkei newspaper reported, paving the way for possible intervention to stem the deterioration of the deteriorating Japanese yen USD/JPY.

Starbucks SBUX,
revealed three-year guidance, expecting adjusted earnings to grow between 15% and 20% on comparable store sales growth between 7% and 9%. Starbucks previously forecast revenue growth of 4% to 5%. It said it will pay back $20 billion to shareholders over the next three years through share buybacks and dividends.

GOOGL of alphabet,
Google lost most of its appeal over a $4.3 billion European Union fine imposed on Android.

The International Energy Agency kept its forecast for oil demand growth for 2023 unchanged after lowering forecasts for China but raising forecasts for the rest of the world. The European Union said it will raise about €140 billion from windfalls on energy companies.

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