Market review 17 October 2022 US inflation report provokes greatest volatility since Covid crisis


Pessimistic market sentiment continued last week as indices maintained their steady decline. The US inflation report, released on Thursday, reminded the markets of how sombre the situation is, but expectations for the new earnings season were still cautiously optimistic. The National Congress of China’s Communist Party so far failed to divulge any significant news on the direction of the country’s economy.

The most significant market event last week was the US inflation report, which was released on Thursday. At the month level, prices rose by a total of 0.4 per cent (expectation 0.2) and 8.2 per cent (expectation 8.1) at the annual level. The rise in housing costs made up the largest share of headline inflation, while travel and fuel costs fell slightly.

Immediately upon the release of the report, the S&P 500 index took a rumble, but managed to rise back into the black the same day. This was the biggest intraday movement in the index since the 2020 Covid crisis. The high volatility can partly be explained by the markets’ low liquidity and poor market visibility.

Due to higher-than-expected inflation figures, the Fed is expected to raise its key interest rate again in November.

In China, The Communist Party’s National Congress began with President Xi Jinping’s speech. The speech did not offer anything new and did not provide answers with regard to the continuation of China’s zero-Covid policy, which is vital for the nation’s economy.

Goods inflation falling, housing and services inflation rising

The decline in transport and fuel costs resulted in a clear decline in freight prices, for example. Lower freight prices also reduce upward pressure on goods prices. Even though food prices rose slightly in the USA, signals put out by the global food market suggest a deceleration in the rise in prices.

Even though goods inflation has slowed, the price development of services remains high. In the future, the biggest headache for the central banks might well be getting the inflation on services to take a downward path.

Housing is becoming more expensive and now constitutes the majority of US headline inflation. Housing costs have traditionally followed home price development with a delay. Typically, home prices anticipate housing costs by one and a half years and a decline in home prices most likely predicts a decline in housing costs in the future. Based on this, we can deduct that also housing costs will decline in the medium term.

The ongoing earnings season is pointing the way for equity market performance

The Q3 earnings season, which began last week, is providing a good indication of what direction economic development will take. The first to report were major US banks. Analysists have reduced their earnings expectations, but they are still high in places. It will be interesting to see how Q3’s weakening economic development and consumer confidence affect earnings development and, on the other hand, how companies themselves see their future earnings development.

A future problem for companies’ earnings may prove to be the inventories they have accumulated during this year, which they have not been able to sell. Companies have bought goods for high prices and now, with inflation slowing, they may have to sell their inventories at a loss. Holiday sales may also contribute to the creation of a deflationary shock.

Equity and fixed income markets suffering from tight monetary policy

The values of both equities and fixed income investments have fallen in recent weeks due to the tight monetary policy environment. Equities continued to fall steadily last week and fixed income indices also came down.

In low-risk fixed income investments, the yields to maturity have risen, however, even above the level in the early months of the pandemic. For example in high yield bonds, the return expectation is already on a par with equity market return expectations.


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