Wake up, Wall Street: the historic inflation data in the US poisons the stock market

An entire generation under the age of 40 is witnessing the greatest inflationary period of their lives. Since the early 1980s, consumer prices have not grown at the current rate. The US attends this Tuesday (2:30 p.m.) the publication of the latest CPI readingcorresponding to the month of March, whose most conservative forecast is a range of 8.5% although most experts believe that there will be a surprise to the upside. This is a figure that worries the public but even more so investors who fear the Fed’s reaction with interest rate hikes to contain it.

wall street is waking up to that possibility after the recovery rally registered in mid-March in the midst of the war on Ukraine. The trigger of stock market deteriorationHe has been the imposing collapse of bond prices and escalation of yields, that move inversely to prices. The ten-year US Treasury debt yield it has soared to 2.78%, its highest level since 2018.

The time frame takes the investor back to the last rate hike prior to 2022 and the stock market crash that occurred then. Now valuations are much higher than then after two years of massive liquidity injections in the markets by most central banks. Now it’s time to go back, but the macroeconomic scenario has become more complex than ever.

the technological nasdaq and growth stocks are feeling the most the change in the direction of the wind in the markets with a 5% drop so far in April. The billionaire giants of the parquet like Apple, Microsoft, Amazon and Alphabet they have started to weaken after the sharp rises in the second half of March.

Even Tesla, which soared 50% in two weeks, is suffering the consequences of lower investor appetite and the closure of its factory in Shanghai. In addition to the nervousness that an out-of-control consumer price data in March can cause, investors are also looking askance at the sharp economic slowdown and large-scale lockdowns in China due to Covid-19.

The latest speeches by the Fed governors and the minutes of the March meeting of the central bank point to a rapid movement of interest rate adjustments and balance sheet reduction (-95,000 million dollars per month) that will remove the oxygen financial hit to Wall Street. Jerome Powell has already shown his cards: the priority is to fight inflation.

“It seems ready to act aggressively in the coming months, intensifying the use of all its levers policies: not only is quantitative tightening likely to start soon and accelerate in a short time, but also larger rate hikes of 50 basis points are expected in the next meetings (…) The Fed is now aware that it is behind the curve and is struggling to catch up with a panorama of deteriorating inflation”, they assure from Federated Hermes.

The demand for hedging instruments grows strongly again among the ‘hedge funds’ with the vix, which measures the volatility of options on the S&P 500, trading above the 25 points in which it moved after the first two weeks of war in Ukraine. The latest survey of Bank of America fund managers showed that the option for liquidity has been at its highest since the outbreak of the pandemic in 2020.

The perfect storm is causing both inflation expectations and continue to rise as the threat of recession grows, especially in Europe and the countries most exposed to the war in Ukraine. The only good news about the photo in the markets is the possibility that the economic downturn will also put out the fire of the energy prices, main drivers of inflation and its second-round effects.