Market Update: August 2022
Following Nancy Pelosi’s visit to Taiwan and a challenging week on the international relations front, President Biden was able to celebrate early last week after the senate passed the Democrat’s landmark bill on climate change, healthcare costs and corporation tax increases.
The bill pledges around $300b to climate change and promises to raise $320b in new taxes over the next ten years. These are incomprehensively large sums in themselves but represent a significant reduction in the intended combined totals of the ‘Build Back Better’ act, which was into the trillions. Markets generally glossed over this, but it was a noteworthy and rare victory for Biden this term.
Last week, all roads led to Wednesday afternoon and the latest US CPI (inflation) figures. As with inflation readings of late, they have the ability to dictate the mood of the markets until the next Fed meeting. Going in, the expectations were a 0.2% in overall inflation due to a reduction in energy prices and a 0.5% rise in core inflation (excluding energy and food).
Instead, the overall CPI index was unchanged, which meant beating foreceasts by 0.2%. The rise in core inflation also came in lower than expected, rising 0.3%.
With energy’s sizeable bearing on overall CPI and the current volatility of prices, we are by no means out of the woods and much as we saw in July when readings surprised to the upside, this can and has happened to equal effect in the opposite direction. Please see June’s reading.
Markets bounced on the positive CPI data and following a period of stronger-than-expected earnings results over the previous fortnight, sentiment was good as it has been for a long time.
All eyes now turn to the Fed and their response. Markets are predicting a slower rate rise this time around, however, officials remain publically hawkish. The Fed’s July minutes will be released on Wednesday, which although slightly behind the curve in a situation developing at pace, will provide more detail into the Fed’s thinking.
Looking ahead, the UK’S CPI readings are due on Wednesday afternoon. The Bank of England is expecting inflation to reach 13% by October, which is higher and for longer than expected, as per the below graph. The case for the European recession is very strong at present.
Other than the aforementioned, we have the US existing home sales and initial jobless claims on Thursday. Please see below markets as at 10:30 am UK time, Monday 15th August.
