Signs that US inflation is peaking spark a broad rally in financial markets

This week the first official signs that inflation may be peaking sparked euphoria in markets. The latest CPI report from the US came in below analyst forecasts, a welcome relief from months of prices rising faster than expected. US stocks had one of their best days on record making nearly 6%. Other equity and bond markets around the world also rallied. Markets are now betting that the Federal Reserve won’t need to tighten interest rates as much and thus the chances of avoiding a recession are improved.

While we don’t want to rain on anyone’s parade it might be just a bit too early to be celebrating. Easing of supply chain disruption caused by Covid is now largely complete and so its impact on inflation is dissipating, while the war in Ukraine and subsequent energy crisis, the other main driver of inflation, is ongoing. We’d point out that inflation of 7.7% is a long way from the central bank’s target of 2%, despite being a lot better than the 8% predicted. While this week’s celebrations might be overdone, we are still positive that things finally appear to headed in the right direction.

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• USA – Inflation matters to markets more than the mid-terms
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