This was published 3 months ago
Opinion
Why this glimmer of hope has Wall Street very excited
Stephen Bartholomeusz
Senior business columnistAt last, there’s a glimmer of good news from an inflation front in the US that for much of this year looked threatening.
After three successive months of higher-than-expected inflation to start the year – which had raised the prospect that the US Federal Reserve might raise, rather than lower, its policy rate – the April data showed a modest decline.
Wall Street bounced to record highs on the back of the inflation data. Credit: AP
The annual rate of 3.4 per cent edged down from the 3.5 per cent experienced in March while the “core” number – stripped of volatile food and fuel prices – fell from 3.8 per cent to 3.6 per cent. The increase in April’s core inflation was the lowest in three years.
Not surprisingly, sharemarket and bond investors who had started to seriously worry about the prospect that, rather than the six or more rate cuts they had priced in at the start of the year, there might be none or even a rate hike, responded enthusiastically to the release of the data.
The S&P 500 index rose 1.2 per cent, posting a record in the process. The tech-heavy and more rate-sensitive Nasdaq index jumped 1.4 per cent and bond yields fell.
After slumping about 4.5 per cent last month after the third month of disappointing inflation numbers the US sharemarket is now up nearly 6 per cent so far this month, with the more positive inflation numbers coinciding with also-better-than-expected quarterly corporate profits.
The slight fall in US inflation, and the improvement in some of the underlying factors that had fuelled the first-quarter rises, has raised the prospect, again, that there might be rate cuts later this year. The market seems to be homing in on a cut in September, giving the Fed time to see whether the April decline is just one data point or the start of a new trend.
The inflation report ought to ease some of the concerns of the Fed’s central bank counterparts elsewhere, not only because it plays down the threat of another inflationary wave but because some central banks, notably the European Central Bank, are on the verge of cutting their policy rates for the first time in this lengthy cycle.
Divergence from the US rate structure would risk further capital outflows and inflation-generating depreciations for currencies that have already been weakening against a rampant US dollar, so the improved prospect for a rate cut in the US this year will make it marginally easier for the Fed’s counterparts elsewhere.
The inflation data came alongside retail sales numbers that were quite flat (a good thing for the inflation outlook) and after recent jobs and wage data that showed some weakening of the US employment market (also a good thing).
The US economy appears to be slowing but is still generating reasonable growth, maintaining hopes of a soft landing and, the inflation data permitting, a more supportive rate environment.
All the numbers and anecdotal evidence – other than the consumer price index prints themselves – have been pointing towards outcomes that should generate less inflation.
The Fed’s chair, Jerome Powell, said earlier this week that the bank would maintain rates at their 20-year highs. While he expected the inflation rate to fall he was less confident than he had been about the outlook. He also said, however, that on the available data he thought it unlikely that the Fed’s next move would be a rate hike.
“We did not expect this to be a smooth road, but these (the first three months’ inflation numbers) were higher than I think anybody expected,” he said.
Rates were by “many, many measures” high enough to slow demand, he said, but the Fed would need to be patient and let its restrictive policy do its work.
While the latest data is encouraging, the 0.3 per cent rise in both headline and core month-on-month inflation – down from 0.4 per cent in February and March – is still solidly above the rate needed to drive inflation down to the Fed’s target of 2 per cent annual inflation. The monthly rate required is a bit less than 0.2 per cent.
The joy with which investors greeted the data may also be premature.
While oil prices have fallen back from the levels of a month ago – Brent crude is trading just under $US83 a barrel where a month ago it was above $US90 a barrel – petrol prices in the US remain elevated and other commodity prices, particularly copper prices, have been surging.
While the latest data is encouraging, the 0.3 per cent rise in both headline and core month-on-month inflation is still solidly above the rate needed to drive inflation down to the Fed’s target of 2 per cent annual inflation.Credit: Bloomberg
This week’s announcement of a range of new tariffs on Chinese imports by Joe Biden also could have inflationary implications if the costs of the tariffs aren’t absorbed by either or both of the Chinese exporters and US importers or if the substitutes for those products are, as they probably will be, more expensive.
Tariffs are, as was experienced when Donald Trump seemed to be slapping tariffs on almost everything the US imported, particularly imports from China, inflationary.
Equity and bond investors, however, were less concerned about what might occur than relieved by the first evidence, albeit only one piece of it, that the inflation rate isn’t starting to surge again.
There were some notable exceptions to the general buoyancy within the markets.
Jerome Powell has said he didn’t think it was likely the Fed would need to consider interest rate increases.Credit: Bloomberg
The meme stock mania that developed this week seems to be fizzling out, with heavy falls in the prices of stocks like GameStop, AMC and Blackberry that had soared earlier in the week.
AMC shares were down more than 20 per cent. GameStop’s almost 20 per cent and BlackBerry’s almost 8 per cent.
Shares in GameStop had soared almost 180 per cent this week before plunging on Wednesday. It was a post that referenced GameStop by the “Roaring Kitty” account on X by Keith Gill – a key figure in the 2021 meme stock craze – that ignited this week’s frenzy of retail investor activity.
While some, perhaps Gill included, may have made a lot of money by cashing out ahead of Wednesday’s fall, the experience of the fallout from the 2021 episode suggests there would also be many retail investors who would have lost heavily from participating in the chatroom-encouraged buying spree with, perhaps, more to come.
There’s no obvious reason, other than irrational buying driven by social media hype, for why the share prices of the meme stocks rocketed and no obvious reason why they shouldn’t fall back to their pre-mania levels or lower.
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