Inflation remains a concern, don't pay attention to these price movements!
While stocks return after earlier losses, it's hard to believe that we can count on the return. Doubt and uncertainty take all over the markets.
Wednesday evening, the Federal Reserve published the minutes of the September FOMC meeting. Minutes mostly confirmed the FED's restrictive policy. However, mainly because of the current uncertain economic outlook, Fed can slow down interest rate hikes after the policy reaches a sufficiently restrictive level.
Although participants noted that risks to the inflation outlook remain skewed to the upside, stemming from a variety of factors including a possible new round of energy price hikes, supply chain disruptions, and weaker industrial production. As a result, participants said that more tightening policies are needed to effectively moderate inflation.
According to the published data, inflation is still high, on both producers' and consumers' sides. The US PPI raised by 0.4% in September, which is higher than 0.2% in market expectations and -0.1% in August. In annual rate, 8.5% was slightly above the 8.4% market expectations. However, it was a little bit lower than a year ago. Producer inflation usually affects the market for a bit longer time, which means in the next two-three months, CPI still can stay around current levels.
On Thursday, we had consumer inflation. According to US Bureau of Labor Statistics data, Consumer Price Index rose 0.4% in September, above consensus expectations to emphasize that inflation continues to stay hot. Excluding food and energy prices, core CPI inflation rose 0.6% in September and 6.6% annually, a fresh cycle high. Even if the lower gasoline prices put downward pressure on inflation, food price inflation moderated slightly compared to the summer months but remains high compared to pre-pandemic rates. Since the US economy is service-oriented, the worrying part of this report, was the core services inflation. Core services inflation raised by 0.8% in September, the largest monthly increase since 1982. Higher prices for shelter, medical care services, and transportation services were the main drivers for service inflation.
Looking the both CPI and PPI numbers can say that FOMC has no choice but to raise the rates by at least another 75-basis point at November 2 meeting. After that, we have just one more meeting by year-end in December. Even if inflation slows down a bit and the Fed raises the rates by just a 50-basis point in that time, still it cannot avoid the risk of recession, and more pressure on the stock markets. Core CPI inflation has raised a 6.0% annualized rate average over the past three months, and it shows that the market will need more time to slow down before the FOMC feels it has this problem firmly under control.
Given these data, the technical downtrend that we can see in the Dow Jones chart seems more likely to continue, especially as long as it is trading under 200-DMA sitting at 32,884.
