Following a slight drop of 0.2 per cent in the United States inflation rate, the latest US April consumer price index (CPI) data indicating higher than expected figures has triggered a fall in the US share markets, leading to a reverberation through its Australian counterpart.
Although the Federal Reserve’s recent decision to hike the interest rate by its highest margin in decades has been followed by an inflationary drop from 8.5 per cent to 8.3 per cent, it’s still an alarmingly high rate above the expected 8.1 per cent.
And the new inflation figure has led to some worrying drops in share markets despite suggestions that the US has passed peak inflation .The S&P 500 index was down 1.65 per cent, while the tech heavy Nasdaq Composite lost 3.18 per cent.
Overall, falls in 2022 have been troubling, with the S&P 500 losing as much as 17.4 per cent - reportedly its worst start to a year in nearly a century - and the Nasdaq Composite dropping a worrisome 27 per cent.
And as indicated by the latest figures from the Australian Stock Exchange (ASX), the Australian market is presently feeling the brunt of the US shock, with tech shares battered by mass sell-offs causing significant pain for investors. As of 1pm, Thursday, the S&P/ASX All Technology Index (ASX: XTX) was down by more than 5 per cent.
While the long-term consequences of this share market fall are presently unclear, financial experts believe the stubborn US inflation could provoke the Federal Reserve into more aggressive action.
According to Russel Chesler, head of investments and capital markets at investment service VanEck, there is “greater chance that we could see more aggressive interest rate tightening from the US Federal Reserve this year”.
Mr Chesler’s assessment follows an admission by Atlanta Fed president Raphael Bostic, who said he is open to “moving more” on rates if inflation remains at current levels.
“With inflation sitting at a 40-year high, equity markets are on edge as the US Fed moves into an aggressive monetary tightening cycle, unwinding the huge amount of monetary stimulus we’ve seen in recent times,” Mr Chesler said, noting that this has fuelled concerns about an impending global recession and possibly stagflation.
In a caution that could provoke intense worry among investors, he said shares could weaken further with the “risk that inflation keeps shooting higher”.
According to Mr Chesler, the US share market remains “especially vulnerable” to higher inflation and interest rates, “dominated as it is by growth stocks, particularly tech shares, which have dropped sharply on higher bond yields”.
Chiming in on the stubbornly high inflation rate in the US, GSFM investment strategist Stephen Miller explained that despite a more aggressive approach from the Fed, financial markets “may well remain in a volatile phase”.
He explained that markets would need time to assess the success of the Fed in reining in inflation without risking a substantial economic dislocation.
“The assessments arising from the Ukraine conflict together with the fallout from China’s COVID lockdown only add to the sources of volatility,” Mr Miller said.
As for the ASX, Mr Chesler remained optimistic.
“We are sticking with our view that the Australian share market is likely to outperform the US share market, with the heavyweight miners and energy exporters benefiting from higher prices.”
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