4 takeaways after the US inflation week

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The trading week that just ended brought more confusion to financial markets. The US inflation data for September was the main event of the trading week, and it brought severe stock market selling.

For about a couple of hours only…because a massive rally began, and the risk assets closed the trading day at their highs, rallying on all cylinders.

However, the frenzy ended the next day when the market gave back half of the previous day’s gains. In other words, this was just the kind of release that would make a trader lose money even if the data was known in advance.

So here are four takeaways from the stock and FX market after the US inflation report:

Inflation is not cooling offThe Fed will continue its aggressive monetary policyUS Retail Sales affected by inflation dataThe US dollar rallied despite a temporary setback

US inflation is not cooling off

Investors were hoping that the US inflation data would show some encouraging signs that prices of goods and services have decreased. Instead, the opposite happened in September.

All three measures of inflation (i.e., CPI m/m, CPI y/y, and Core CPI m/m) have exceeded the market expectations. In other words, inflation is not cooling down, and this is a worry for risky assets.

The Fed will continue its aggressive monetary policy

As legendary investor Stanley Druckenmiller noted, once inflation exceeded 5%, it has never come down without the funds rate going above the inflation rate. Inflation in the US now sits at 8.1% y/y, while the funds rate is at 3%-3.25%. Hence, more tightening from the Fed lies ahead.

“Once inflation goes above 5%, it has never come back down without the Fed Funds Rate exceeding the CPI”
Stanley Druckenmiller

US CPI (inflation) for Sept was 8.2%

— Win Smart, CFA (@WinfieldSmart) October 14, 2022

Retail Sales data shows inflation hurting the US consumer

One day after the September US inflation data, the Retail Sales for September showed that the US consumer is affected by the rise in the prices of goods and services.

More precisely, the inflation-adjusted picture shows that households are pulling back as the inflation pinch is broadly visible.

The US dollar keeps getting stronger

The US dollar rallied after the inflation report was released, then gave back all of its daily gains only to rally the next day again. It tells us that traders still look for the right direction, and any move should be taken with a grain of salt.

So far this cycle, every time investors sold the US dollar, it turned out to be just a correction. Eventually, the greenback climbed back to the highs.

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