US inflation hits highest level in nearly 41 years, intensifies aggressive Fed bets and raises market risk aversion

If the European Central Bank (ECB) had already soured markets the day before by increasing its tone of concern about inflation and not ruling out a rate hike of up to 0.5 point in September, the US consumer inflation data further contributed to global risk aversion, leading to a general fall in equity markets and a rally in the dollar against several currencies.

Data released early on Friday (10) showed that consumer prices in the United States accelerated in May, suggesting that the Federal Reserve may have to continue with interest rate hikes until September to fight inflation.

The CPI index (CPI) advanced 1.0% in May compared to April, a sharp acceleration from the 0.3% rise in the previous month and beating the forecast of analysts consulted by Refinitiv, who estimated an increase of 0. .7%.

The core CPI, which excludes volatile food and energy prices, increased 0.6% month-on-month in May, the same change recorded in April. In this case, the market consensus also pointed to a smaller increase of 0.5%.

Year-on-year, the US CPI jumped 8.6% last month, the highest level since December 1981, after gaining 8.3% in April.

The core, on the other hand, had an annual increase of 6.0%. Analysts had expected the rise to be 8.3% for the full indicator and 5.9% for the core. The index that measures energy prices soared 34.6% in May compared to the same month in 2021, the highest value since September 2005. Food prices rose 10.1%, the first double-digit increase since March 1981.

The inflation report was published ahead of what is expected to be the Fed’s adoption of a second consecutive 0.50 percentage point rate hike next Wednesday. The US central bank was also expected to raise its base rate by another 0.5 point in July before the data was released. The Fed has already raised borrowing costs by 0.75 point since March.

The market’s big question was whether, as of September, there would be a “stop” in interest rate hikes or at least a slowdown. However, the higher-than-expected data ended up throwing a bucket of cold water on these expectations and raised the chances of an aggressive tightening in interest rates.

The impact on the equity market is clear, with US stocks plummeting (Nasdaq down more than 3%) while US two-year bond yields top two-year highs. In Brazil, the Ibovespa fell by around 2% at the lows, while the dollar rose sharply, reaching over R$5 on the intraday.

“Inflation is now at a 40-year high with little evidence that it has peaked,” John Doyle, vice president of trading and operations at Monex USA, told Reuters. “Stocks are extending losses in anticipation that the Fed can find room to accelerate rate hikes. The dollar is gaining on divergence between monetary policies and risk aversion,” he said.

As Goldman Sachs points out, while an increase in airfares again contributed to the core’s advance, the composition was also quite strong overall, including higher auto prices and the fastest monthly pace of rent inflation since 1987.

As a result, the bank now expects the Fed to raise interest rates by 0.5 percentage point in September, versus the previous estimate of 0.25 point, in addition to 0.5 point hikes in June and July.

Bank of America pointed out that inflation data in the country shows that the rising price is no longer an issue of supply chain disruption.

“The data is consistent with our view that inflation is no longer just a function of disruptions in the goods supply chain. Inflation is also being driven by strong consumer demand due to a heated job market and strong wage inflation”, he summarizes.

BofA strategists point out that, although the base case remains a 0.25 point increase in interest rates in September (following already signaled 0.5 point increases in June and July), today’s data raises the risk of another 0.5 point increase.

In addition, he points out that the movement of the yield curve after the data sets prices for some probability of an interest rate increase by 0.75 points at the July meeting. “This curve movement is consistent with a Fed needing to move up aggressively to cool inflation at the expense of long-term growth and is consistent with our baseline stagflation scenario,” he notes.

Morgan Stanley points out that, after the indicator, it predicts a more “hawkish” (harsh, concern about inflation) tone from the Fed at next week’s meeting.

“Inflationary pressures remained extremely broad, with prices of major goods reaccelerating, owing to continued increases in new and used car prices, along with a jump in apparel prices,” Morgan points out.

“It became clear that inflation remains high and at least in some areas it may in fact still be accelerating a bit, setting a hawkish tone for next week’s FOMC meeting,” he recalls.

For Étore Sanchez, economist at Ativa Investimentos, the most prominent surprise of the data was that the full number accelerated again, from 8.3% to 8.6%, above the most pessimistic of the agents, whose projection was at 8 .5%.

The advance was concentrated in food and energy, but the effect on the nuclei was also not negligible. Although it showed a deceleration, from 6.2% to 6.0% on an annual basis, the speed of the fall was slower than what most of the market expected, since the median of expectations was 5.9%.

“The theory that inflation had already reached its peak loses strength with the headline accelerating again”, he highlights. Even watching the cores decline, the pressure on the Fed mounts again, especially on the terminal rate, as the pace appears to be paved up by 0.5 point per meeting, he points out.

(with Reuters and Estadão Content)

Looking for a good buying opportunity? XP Strategist Reveals 6 Cheap Stocks to Buy Today.