Inflation Data Spark Diverging Views in Stocks and Bonds

Barry Adams
14 Oct, 2022
New York City

Stocks on Wall Street struggled a day after a sharp advance as investors digested the implication of a slight decline in consumer price inflation. 

The latest inflation reports sparked two diverging reactions from stock and bond markets. 

Stock investors hoped that the slight cooling of consumer inflation may be followed by weaker inflation data in the months ahead while bond investors focused on the elevated inflation rate above 8% and surmised that the Fed will continue its aggressive rate hike campaign. 

Stocks reversed 3% decline and closed up more than 2% and Treasury yields advanced in Thursday's trading. 

The yield on Treasuries extended gains on Friday while major stock averages erased most of Thursday's gains. 

The S&P 500 index fell 0.5% to 3,649.28 and the Nasdaq Composite index dropped 1.20% to 10,521.51. 

Crude oil fell $2.65 to $86.52 a barrel and natural gas dropped 28 cents to $6.45 a thermal unit. 

The yield on 2-year Treasury notes inched lower to 4.45%, 10-year Treasury notes to 3.96% and 30-year bonds to 3.96%. 

  

European Markets Trim Gains, UK Government's Tax U-Turn 

European markets trimmed morning gains following the weakness in New York trading. 

The FTSE index increased 0.6% to 6,893.77, the DAX index jumped 1.7% to 12,571.05 and CAC-40 index advanced 2.04% to 5,999.03. 

UK Prime Minister Liz Truss fired finance minister Kwasi Kwarteng and reversed corporate tax cuts announced in the mini-budget last month. 

Truss doubled down on her growth policies but said corporate tax cut will remain at 29% and reversed the earlier proposal to lower it to 19%. 

The U-turn on the unfunded tax reduction proposal is expected to calm volatile Gilt market but questions remain how the government will fund its energy subsidies to households. 

The Bank of England is set to end its long-term bond purchase program today, an emergency measure in support of the orderly functioning of the bond market and provide a rare rebalancing opportunity to pension fund managers. 

The euro fell 0.5% to 97.24 U.S. cents and the British pound dropped 1% to $1.118. 

The yield on 10-year UK bonds increased to 4.21%, German bunds rose to 2.308%, French bonds to 2.908% and Italian bonds to 4.74%. 

The Hungarian Forint advanced more than 2% and traded near 429 against the dollar after the National Bank of Hungary lifted its overnight collateral lending rate by 950 basis points to 25% in an emergency meeting on Friday.

The central bank lifted rates by a large amount in support of the falling forint and said that the bank will provide foreign currency for energy imports from its reserves. 

 

Asian Markets Advance Following Gains in New York 

Markets in Asia jumped following Thursday's advance in New York. 

The Japanese yen dropped to a new 24-year low of 148.23 against the dollar and the rupee held stable near record low of 82.22. 

Consumer price inflation accelerated at the fastest pace in more than two years but wholesale prices eased, according to the data released by the statistics bureau. 

Consumer prices rose 2.8% in September from 2.5% in August but wholesale price growth moderated to 0.9% on falling commodities prices and a change in comparison base. 

The Nikkei 225 average soared 3.2% to 27,090.76, the Hang Seng index increased 1.2% to 16,587.69 and the Sensex index gained 1.2% to 57,919.97. 

Benchmark indexes in India jumped led by a rise in IT sector after Infosys and MindTree reported better-than-expected earnings.