Dow Jones drops 1,300-points to the industrial average. The Treasury sells bonds that send higher yields. Signs of panic selling on Wall Street. And a dollar is rising somewhat to its highest level in two decades. All in one day.
Jim Vogel of FHN Financial said Thursday’s price action provided a “component” in the face of the risk that US inflation will continue to rise despite the Federal Reserve raising interest rates. And it’s an opportunity that can’t be ignored, he said.
Although many in the financial markets suspect that US inflation has already peaked, the risk is that it has not, creating room for further volatility across assets. According to RBC Capital Markets, traffic congestion at the global port, which serves as a carrier of trade, has worsened since last year. And in a rude surprise for investors on Thursday, the Bank of England revealed both a double-digit inflation outlook for the UK, as well as the prospect of sharply slower economic growth.
Read: The pound fell to a near 2-year low, although the Bank of England raised the key rate to 1%
“There is a risk that inflation will continue to rise and that this will come from compounded labor-market pressures that will continue to come with supply shortages and logistical problems,” said Vogel, vice president of Memphis-based executive.
Views: Why the fall in the stock market is partly due to the bad news on the inflation front
With the range of professional estimates for the U.S. Consumer Price Index excluding food and energy ranging from 2% to 3.5% for next year, derivatives traders see the core CPI approaching 4.1% in 2023. The chart below shows where the derivatives traders are now going to see the gauge, as reflected in the blue line, where they expected it in March.
“When we’re in a low-inflation camp, you can’t rule out the risk of inflation going up,” Vogel told FHN by phone. “There is a real possibility for that.” Although China’s Covid-19 shutdown is a problem, Russia’s war against Ukraine has the potential to raise prices for everything from raw materials to commodities and labor, he said.
Generally speaking, most forecasters in the United States are optimistic that inflation, which is currently at its highest level in four decades, will finally subside. Economists surveyed by The Wall Street Journal in April saw another measure that excludes food and energy, also known as core PCE, from an average of 4.3% this year to 2.8% in 2023. They saw the annual headline rate of the consumer price index fall from 7.5% this June to 2.9% between December 2023.
The Dow Jones Industrial Average DJIA included more than 1,300-point drops during the last hour of trading in Thursday’s roller-coaster ride in the financial markets. Treasury yields were higher, with rates trading above 3% for all trades in 7- to 30-year maturities. The ICE US Dollar Index DXY rose 1.2% to its highest level since the second half of 2002.
See also: Why is the Dow down more than 1,000 points? Should I wait for the stock to sink less? Here’s what some professionals think.