Febrero 19, 2018

United States inflation data spells more trouble for stock markets

15 Febrero 2018, 04:23 | Crisanna Felipe

Representational Image

Factory output rises to 7.1% in December 2017 manufacturing sector grows by 8.4

Investors shrugged off warning signs about inflation.

"This time around we are working on the assumption that the transport services category, air fares particularly, will apply some upward pressure to the 12-month inflation rate, with the month-to-month drop in prices likely to be less than in January a year ago", she said.

Earlier this month, RBI kept interest rates unchanged and flagged risks to inflation from several factors, including the government missing the fiscal deficit target for 2017-18.

The Bank of England strengthened its economic forecast Thursday and announced it will likely have to raise interest rates both earlier and higher than it expected in November.

"These reports tell two stories:. that the real economy may not be as strong as we thought, but also that inflation may be a bit higher", said Paul Ashworth, chief USA economist for Capital Economics.

The ONS said that smaller increases in food prices were offset by a pick-up in prices for clothing, footwear and recreation.

"The fact that. losses are being trimmed, suggests that the market could be slowly starting to get to grips with the new higher inflation environment reality", said Fiona Cincotta, market analyst at City Index. Markets more closely track the "core" numbers as the Federal Reserve prefers to strip out the more volatile costs of food and gas. The Fed has signaled it will raise rates three times this year for the second year in a row.

"While the door remains open for a May interest rate hike, the Bank of England will likely need to see indicators of the economy's health improve to be sufficiently reassured that the economy is ready for another rise in borrowing costs".

Though a hint of faster inflation could inject more panic into the market, there is more reason to think that inflation fears are overblown.

Dow futures fell more than 200 points in response to the news.

The yield on 10-year U.S. Treasury notes has risen nearly half a percentage point since the beginning of the year.

Bond markets sold off in the immediate aftermath of the announcement, with the United States 10-year Treasury yield rising to highs of 2.88 per cent, its highest since Monday, according to Tradeweb, after previously holding at or below 2.84 per cent.

At first blush, the move higher in stocks seemed counterintuitive. Wednesday trading signaled that they may be returning to a more stable relationship. The cumulative growth in these three sectors during April-December 2017 over the corresponding period of 2016 was 2.8, 3.8 and 5.1 percent respectively.

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