Hot US Inflation Has Three Risks for Investors – and One Great Hope

The Australian Financial Review2022-10-14

Worse than expected US inflation data guarantees the Federal Reserve will keep raising interest rates. Former Bank of England boss Mervyn King says investors need to watch three key risks.Forget the ...

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Former Bank of England boss Mervyn King says investors need to watch three key risks.Forget the ...</p>\n\n<a href=\"https://www.afr.com/chanticleer/hot-us-inflation-has-three-risks-for-investors-and-one-great-hope-20221014-p5bpru\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"XKO.AU","symbol_name":"标普/澳交所 300指数","start_time":0,"source_url":"https://www.afr.com/chanticleer/hot-us-inflation-has-three-risks-for-investors-and-one-great-hope-20221014-p5bpru","article_id":"2275094608","we_media_id":null,"thumbnails":[],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2275094608","pubTimestamp":1665716777,"sourceInfo":{"source_id":"afr_stock","name":"The Australian Financial Review"},"weMediaInfo":null,"summary":"Worse than expected US inflation data guarantees the Federal Reserve will keep raising interest rate","collect":0,"end_time":0,"defaultTopTitle":"afr.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"XKO.AU":"标普/澳交所 300指数",".DJI":"道琼斯",".IXIC":"NASDAQ Composite","XAO.AU":"标普/澳交所 普通股指数",".SPX":"S&P 500 Index","XJO.AU":"标普/澳交所 200指数"},"translate_title":"美国热通胀对投资者来说有三个风险--也有一个巨大的希望","themeId":"","isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{".DJI":0.9,".IXIC":0.9,".SPX":0.9,"XAO.AU":0.9,"XJO.AU":0.9,"XKO.AU":0.9},"content_text":"Worse than expected US inflation data guarantees the Federal Reserve will keep raising interest rates. Former Bank of England boss Mervyn King says investors need to watch three key risks.Forget the bewildering bounce on Wall Street on Thursday night.The latest US inflation data is unequivocally bad news for the Federal Reserve and for markets, confirming the Fed has no choice but to keep tightening until it breaks something – labour markets, global economic growth, the plumbing of the financial system, or possibly all three.Equity investors are waking up to the reality that central banks will need to inflict some pain to get inflation under control. David RoweThe consensus of economists was for headline inflation (which includes the most volatile items, such as gasoline and food) to fall from an annual rate of 8.3 per cent in August to 8.1 per cent in September. Instead, it came in at 8.2 per cent, with the monthly rise of 0.4 per cent double what the market expected.But the really bad news was in core inflation, which excludes those volatile items. It accelerated from 6.3 per cent year-on-year in August to 6.6 per cent in September.There was plenty of fun poked at divisive Ark Invest founder Cathie Wood this week after she wrote an open letter to the Fed claiming inflation was coming down, and the central bank needs to stop raising rates – high rates are poison for her tech-heavy fun.But in truth, most economists seem to have joined Wood in falling for the “streetlight effect”.While a number of prices have fallen from their highs – iron ore, corn, shipping rates, used cars, copper and timber, to name a few – these tend to be prices we can easily track, that are in the market’s streetlight.It’s the prices that are more difficult to track through public data sets – food away from home, transportation services, medical services, shelter – that are proving stickiest, leading the market to consistently underestimate CPI.The common feature of these inflation hotspots is that they are mainly services sectors, which continue to feel the effect of wage growth created by America’s white-hot labour market.As former US Treasury secretary Larry Summers said this week, until unemployment rises from 3.5 per cent to around 6 per cent, it’s going to be very difficult to get inflation down. And to get there, the Fed has no choice but to keep raising rates until it creates major economic pain.Yes, Wall Street rebounded from being down 2.4 per cent to finish Thursday night up 2.6 per cent in a remarkable turnaround.But don’t get too excited – sentiment is so poor on global markets, and the market was so well positioned for a bad inflation number that a tiny rally appears to have been exacerbated by short-sellers madly covering their positions.But make no mistake: the hot CPI numbers mean the Fed is all but guaranteed to raise rates by 0.75 per cent next month to between 3.75 per cent and 4 per cent.Bets on the terminal rate (the peak for this tightening cycle) also rose on Thursday night from 4.66 per cent to 4.85 per cent next March and a growing number of economists are now tipping rates will need to go to 5 per cent to cool inflation that simply isn’t rolling over as the market expects.For investors, that means the pressure on equity and bond markets is not going to relent any time soon.“We’re seeing the beginning of the Great Repricing as I would describe it, and that repricing is going to have significant impacts on portfolios of many investors,” former Bank of England governor Mervyn King says.“But this is an inevitable consequence, in my view, of a return to more normal levels of interest rates, which ought to be highly welcomed. And central banks shouldn’t try to stand in the way of such a repricing.”King, who appeared this week at the Citi’s annual Australian investment conference, makes an important point: the CPI data suggests that the period of painful adjustment we are sailing into hasn’t actually started yet – despite the fastest rate-hike cycle in generations, the US and Australian economies haven’t really slowed in a meaningful way.King sees three key risks that investors need to understand – and one great hope that the market, central banks and politicians should cling to as we enter this Great Repricing.The first risk is that central banks change course and, as the BoE has done in British bond markets in recent weeks, prioritises financial stability over fighting inflation.“If central banks were to step in and backstop bond markets, and get sucked into putting in place again a ceiling on long-term yields, then we’ll end up with inflation staying higher for longer,” King says.“We’ll end up with fiscal dominance, and weaker central bank independence. And that I think would mean that the measures that would have to be taken further down the road to bring inflation back to the target would be more prolonged and more painful.”Risk two is obviously the mounting concern that a global recession is coming. A big part of this will be strength of the US dollar, which will only continue to grow as the Fed raises rates; a stronger US dollar will worsen inflation in other countries (who need to spend more local currency to obtain commodities, thereby importing inflation) and crush developing countries, whose debt burdens become more difficult to finance.A global recession will obviously also be poison for corporate earnings, which have so far done well on Wall Street and the ASX. And if profits head south, so too will share prices.King’s third risk is a fresh debt crisis which “reflects the scale of debt, and the fact that you can see debt problems right across the world in sovereign debt, right across the world in corporate debt and increasingly embedded leverage in the financial sector”.The UK pension crisis that has caused chaos on British bond markets is an example of this. But intervention by central banks in markets to resolve these blockages carries political risks, King says, in that it will show central banks “will do things to help parts of the financial sector that they will not and cannot do to ordinary families and households”.Summers says the lack of trust the middle class has in the policymakers has already seen the world lurch towards right-wing populism; you can only imagine this trend would be exacerbated if central banks bail out Wall Street and leave Main Street to bear the pain – again.King is not alone in identifying these three big risks. But where he does differ from many experts is that he also provides a coherent view of the bigger prize that is at stake here.Yes, we want to get inflation down because it destroys purchasing power and distorts markets. But King also argues that by slaying inflation and weaning the world off the very low-interest rates it has become reliant on since the GFC, we can fix the global economy.“There’s one big upside which we must keep our eyes on,” he says. “If we can get through this, bring inflation back to the target, adjust again to a world of much higher interest rates than the past decade, then we will see not only a reduction in indebtedness in the economy, but a rebalancing of our economies, both internally and externally.”The allocation of capital to unprofitable companies – including the so-called zombie firms that only survive because rates are so low – will end, shifting the dynamics of the global economy. Instead, capital will flow to profitable, growing companies, who create jobs, productivity and wealth.“We’ll see a reallocation of resources from unprofitable companies to more profitable companies,” King says. “That will, I believe, allow productivity growth to go back to earlier levels, and we will see faster growth of GDP.“I don’t think the pessimism of many economists that we’ve entered a world in which productivity growth will be permanently lower than we were used to well before the financial crisis is justified.”Returning to this pre-GFC world, where capital actually had a cost, is certainly a fine goal. But the question, as raised by commentators including Macquarie’s Viktor Shvets, is whether economies and markets could actually survive this, given the incredible level of debt built up by governments, businesses and households in the past 15 years.It seems likely the Fed and other central banks will test the limits of how much pain the world can take. But whether they’re really prepared to take the Great Repricing to its logical conclusion remains to be seen.Either way, investors must be ready for a very bumpy ride.","kind":null,"is_publish_news":true,"is_publish_highlight":true,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":23,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2275094608"}