Market Sentiment Retreats From NYC to Tokyo

Key Indices across the world took a major hit as last week drew to a close. Perhaps due to yet another jump in inflation revealed by the most recent data released by the U.S. Bureau of Labor Statistics, a cloud of pessimism may be descending over trading floors, and it’s anyone’s guess if and when this fog of risk aversion will be lifted.

Inflation Strikes Again

Talk of inflation has filled the mouths and ears of those following ecםnomic trends in the United States for the past several months. As the world’s largest economy came roaring out of the doldrums induced by COVID-19 infections and the subsequent widespread lockdowns, prices for a range of consumer goods began rising.

The collection of potential causes that have led to rising inflation has proven difficult both to disentangle as well as to tamp down. The ongoing conflict between the Russian Federation and Ukraine, now reaching well into its third month, has brought prices of key Commodities like Oil (CL) and Natural Gas (NG) skyward as Western embargoes and concerns regarding possible delivery disruptions took centre stage. Additionally, continuing supply line issues have increased the costs of a variety of inputs for producers, the economic burden of which is then partially passed on to the consumer.

Last Friday’s Consumer Price Index (CPI) data released provided little relief for those who might have been hoping for an easing of price pressures. According to the Bureau of Labor Statistics’ May data, inflation in the United States reached an annualised rate of 8.6% last month. This is in keeping with the trend seen in recent months of the most rapid price increases seen in America since the stagflation era of the early 1980s. 

But this was not all the bad news released to the public on the final trading day of last week; apparently, consumer sentiment among American citizens has also reached a record low. It may be concluded from these most recent figures that the average U.S. resident isn’t feeling particularly pleased regarding the current direction of the country’s economy.

Wall Street Jitters

Following the publication of these relatively gloomy data points, Wall Street traders initiated a broad-based retreat. Over the course of the trading day Friday, three of New York’s most important Indices showed significant drops.

By the ringing of the closing, the S&P 500 (USA 500) had fallen in value by 2.9%. The Nasdaq (US-TECH 100) and Dow Jones Industrial Index (USA 30) were not spared by investors on Friday either, with 3.5% and 2.7% falls respectively. Taking last week as a whole, these premier Indices posted their worst weekly performances since late January of this year.

According to many market experts, an atmosphere of uncertainty and risk avoidance is palpable on trading floors at the moment. Most had not expected inflation to continue to rise at such a consistent rate in May following the Federal Open Market Committee’s institution of rapid interest rate increases since March; last Friday’s CPI surprise may have many wondering if a return to price stability can even be seen on the horizon.

Uncertainty Across the Pacific

As may be expected by the savvy market watcher, the effects of the United States’ economic travails are not limited to North American shores. With the American economy making up over a fifth of global Gross Domestic Product (GDP), negative trends quickly ripple outward from the U.S. to other countries.

This phenomenon can be keenly observed on Asian Indices this morning. Tokyo’s Nikkei 225 (Japan 225) closed down by 3%, while Hong Kong’s Hang Seng Index (Hong Kong 50) dropped by more than 3.4%. Many market experts are positing that this most recent drop in Asian share values can be directly attributed to the high inflation and low consumer sentiment numbers revealed in the U.S. on Friday.

Looking forward, whether the Federal Reserve, America’s central bank, will succeed at reining in inflation over the near-term is shrouded in uncertainty. Consensus expectations are that this week’s FOMC meeting, to be held Tuesday and Wednesday, will conclude with the announcement of another 0.5 basis point increase in the interest rate at the following press conference. However, given price increases’ continuing stubborn climb upwards, it remains to be seen if the Fed’s hawkish turn on monetary policy can return stability to the markets and prevent a further slide in Indices like those seen across the world in recent trading sessions.