While Asian stock markets are rallying, the US inflation numbers are not as bad as anticipated.
US stock markets plunged on Wednesday after US inflation numbers were reported that showed more than expected price rises. At the start of trading in New York, the benchmark S&P 500 had plunged 3% and the tech-heavy Nasdaq composite index tumbled 4.1%.
The main culprits for this drop were higher-than-expected U.S. consumer price index (CPI) figures in April.
Inflation numbers are the main focus for investors. Worsening inflation indicates more expensive goods and services, which could lead to future price increases and inflation in turn. The CPI is one of the indicators that the Federal Reserve tracks to determine how quickly it will raise interest rates. In response, investors sold off stocks that are sensitive to interest rate changes, such as banks and real estate companies.
In fact, the number of companies in the S&P 500 that have been reporting earnings this season is at the lowest level in five years. As a result, there is plenty of room for surprises. If a company reports better than expected figures than it may experience a jump in its share price. But even if it reports as expected, it may still see a jump as prices are generally low due to fears of slowing growth and higher interest rates.
Asian stock market:
In a similar move to the US, Asian stock markets traded higher as investors in Japan and Hong Kong took heart from not-as-bad inflation numbers in the US. Japan’s Nikkei 225 index ended the day up 2.6% at 19,430. Hong Kong’s Hang Seng Composite closed up 1.5% at 23,856.
The Shanghai Composite also posted gains with a 1% rise to 3,172 after earlier falling nearly 2%. The day’s gains in China were helped by a softer dollar, which makes its exports cheaper overseas. The Aussie also managed to edge higher 0.3% at $0.7337 after it earlier fell as much as 1%.
Investors also took some comfort from the fact that oil prices edged slightly lower on Wednesday despite the OPEC deal to cut oil production by 1.2 million barrels a day. At one point the benchmark contract for US crude was down nearly 2% at $48.
How serious are the inflation numbers?
While the increase in prices over the past 12 months hit a four-year high, this is not as severe as in January, February or March and is still lower than the levels seen a year ago. Analysts will be closely watching whether this number represents a peak in inflation or a new trend. If it continues past an increase of 3%, it could potentially lead to higher interest rates.
For now, this increase in inflation is not really translating into higher growth. GDP figures for the first quarter of 2017 were reported as only 1.2%, well below the 2% that was expected and a drop on the previous quarter’s 2.1%. In addition, job creation numbers fell to a three-month low of 138,000 new jobs in April.
How are the Federal Reserve likely to react?
Fed Chairwoman Janet Yellen said in February that rising inflation was to be expected in an economy with a low unemployment rate. It is more likely that the US central bank will take these latest figures as confirmation that inflation is on track and may accelerate its expectation of three interest rate hikes in 2017.
Many investors believe that the Fed may act to hike rates much sooner than previously anticipated and could raise rates twice this year, with one more increase coming in December.
The USD/INR fell in response to the US inflation figures as it makes imports more expensive for the Indian economy. The fall in the value of the USD/INR is good for India’s exports. In addition, falling oil prices also mean that India’s import bill will be reduced and its economy will benefit from lower fuel costs.
