U.S. Inflation Spooks Markets

The What does a secondary dealer meanUS CPI number, released yesterday, spooked investors and traders as not many were expecting that number. Market players were of the mind frame that US inflation has peaked and the path of the least resistance is skewed to the downside. However, the fact that the actual inflation number printed a reading higher than the market expectations took everyone by surprise and created a massive event in the market.

All the major US stock indices took a sharp nose dive yesterday on the back of the US CPI data. We have seen such a reaction in the markets mainly because now traders aren't sure what will happen with the Fed's monetary policy. Clearly, the interest rate hikes that the Fed has introduced so far haven't been able to tame inflation in the way that they have been expecting. Yes, indeed, inflation hasn't printed another peak reading for the past two months, but at the same time, inflation isn't slowing down. For instance, if we had a number yesterday that printed a reading lower than the market forecast, then trades would have been much more comfortable. This is because the message would have been that the Fed's monetary policy is working. Under those circumstances, the Fed would have only increased the interest rate by 50 basis points and maximum by 75 basis points.

Now, the situation is looking completely different. Traders are worried that the Fed will be immensely aggressive; they have already been sending many hawkish messages, but now the delivery and action could be even more hawkish. This is what creates significant chaos in the market.

Speculators have started to tout that the next interest rate hike by the Fed could now be even a whole percentage point, which means 100 basis points. Many Fed members have wanted the Fed to increase the interest rate more aggressively, but the Fed Chairman has been reluctant to that idea as higher rates also cut economic growth.

Jerome Powell will now struggle in front of hawkish Fed members, and he will have very little to say in his defence. This is what is worrying the most; hence, bulls are nowhere to be seen in the markets.

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