Inflation surges in US, stokes concerns in markets - Raiz Invest


George Lucas, Raiz Group CEO

First, we look at the US where the latest inflation numbers were a surprise, and the stubbornness of inflation apparent in the data release was unexpected. The data for May showed the consumer price index rose 8.6 per cent over the year, the biggest rise since December 1981.

Stubbornly high inflation, coupled with the willingness of major central banks in developed markets to tighten policy further in response, is not helping markets. Indeed, some pundits now say that central banks may need to induce a recession if they want to bring inflation back within target range.  So talk is switching to discussions of a hard landing.

Talk of an ‘induced recession’ also saw oil prices fall.  The price of Brent — the international oil benchmark — settled at $113.12 a barrel on Friday, down about 5.5 per cent on the day and the lowest close for Brent since 20 May 2022.

On central banks, we’re seeing their resolve in tightening. The Reserve Bank of Australia recently lifted by 50 basis point, the US Federal Reserve hiked by 75 basis points and the Bank of England lifted by 25 basis points. There was also the surprise hike by the Swiss National Bank of 50 basis points, which spooked the markets last week.

The extent of the situation is evident in that Japan is now the only member of the G10 group of nations not tightening policy. The result is that the yen has dropped significantly against the US dollar.


Stock markets plunge amid growing recession fears

As mentioned, the moves by the central banks have resulted in substantial weakness in equities over the last week. Bonds are also being sold off and this joint sell-off is resulting in a poor performance from a “60:40” equity/bond portfolio, including, for instance, our moderate portfolio.

The extent of the equities slump is clear. Last week, stocks suffered their heaviest weekly fall since the COVID-19 outbreak with the FTSE All-World index of emerging and developed markets dropping by the most since March 2020, down 5.6 per cent. The S&P500, meanwhile, was down 5.8 per cent.  Australian equities fell 6.6%.


Australia Government lifts minimum wage

Also in Australia, there are no signs of a recession yet. Indeed, the recently announced increase in the minimum wage will lift the Wage Price Index and add upward pressure on inflation more generally. Also, there were strong jobs gains in May, with net employment surging 60,600.

The increase in minimum wage and strong labour market will keep pressure on the RBA to continue its aggressive hiking cycle in the months ahead for interest rate.


Signs of post-lockdown recovery in China

Elsewhere, there was upbeat news in China, with the Asian superpower’s activity and spending data for May suggesting a post-lockdown recovery is underway across most of the economy.

The recovery is likely to have progressed further in June, however the latest data also underlines that the recovery in consumer activity still has a longer way to go than the rebound in industry.

Meanwhile, Bank Indonesia (BI), the central bank of the southeast Asian nation, is expected to leave its policy rate on hold at 3.5 per cent this week.



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