Keep Calm & Carry On: US Inflation Disappoints, Truss Blinks & US Equities Bounce – C.J. Lawrence Market Commentary October 13, 2022
Going into the September inflation report today, the market was already worried about more fallout from the UK after the Bank of England on Tuesday drew a line in the sand that it will only intervene to support UK government bonds until Friday. This sent a clear signal to the UK government and pension funds exposed to UK GILTS to get their house in order. It seems the Truss Government blinked, signaling a reversal of its fiscal policies which were in direct contradiction to the Bank of England’s (and most of the World’s) policy to fight inflation. The British Pound finally stabilized versus the US$, see chart and US equities staged a massive reversal to the upside despite the disappointing inflation report.
Turning to the September inflation report, headline CPI year-on-year for September was down slightly at 8.2%, in line with the previous three declines. The all-important core inflation which excludes food and energy was unfortunately up again. About 50% of core inflation is related to “shelter,” with owners’ equivalent rent up 0.6% month-on-month. This equates to an annualized rate of 6.7%, the highest on record. There is some discussion among academics that the government’s methodology to calculate “shelter” is not designed to pick up the more current housing data which is turning down. The risk regarding Fed policy based on lagging economic data is that it will overshoot and put the economy into a recession some time in 2023. The bond market may already be signaling that. The 10-year Treasury has been unsuccessfully trying to pierce the 4% since US-Treasury yields spiked in late September. A peak in long-term interest rates would be supportive of equity valuations going forward.
To quote our British friends: Keep calm and carry! Markets continue to be very oversold at these levels. Stay tuned!