America’s inflation headache won’t go away and investors are starting to realise the Federal Reserve will have to continue with the tough medicine seen in this month’s 0.50% rise for much longer than expected.
The US consumer inflation report for April did show a tiny hint of a slowing in the pace of growth but it wasn’t enough to give investors a sniff of relief.
The headline rate remains a concern for markets and investors remaining around four-decade highs in April at an annual 8.3%, seasonally adjusted, down a touch from the 8.5% in March.
Core inflation (which excludes food and energy) eased to 6.2% from 6.5% the month before and still around 40 year highs.
Investors had been looking for the core rate to fall under 6%. It didn’t so they sold off shares, again.
Food prices increased by 0.9%, while energy prices fell by 2.7% after an 11% surge in March. Petrol prices were down 6.1% after an 18.3% gain in March (in the immediate wake of the Russian invasion of Ukraine).
Owners’ equivalent rents rose by 0.5% (the cost of housing to homeowners), while regular rents rose 0.6%. America has had a home price boom as well – it’s just not Australia. There were also notable rises in prices of new vehicles and airline fares (heading into the US summer holiday season), offset by another small fall in used vehicle prices and a fall in apparel prices.
The report will not change the market’s view that the Federal Reserve has a couple of 0.50% increases in the federal funds rate to come in the next three months.
Another reading of 8% or more for May this time next month will be an even bigger worry as it will send a message that perhaps the Fed will have to have three separate rises of 0.50%, one after the other between now and September, with a 0.25% rise in November to lift the federal funds past 2%.
Month to month inflation rose by 0.3% in April, ahead of expectations for a 0.2% increase but better than the 1.2% rise in March.
Core CPI, which excludes food and energy prices, rose by 0.6%, faster than the market estimate for a 0.4% increase. Core CPI rose by 0.3% in March.
The price rise also meant that US workers continued to lose ground. Real wages adjusted for inflation eased 0.1% in April from March despite a nominal increase of 0.3% in average hourly earnings.
Over the past year, real earnings have dropped 2.6% even though average hourly earnings are up 5.5%. Falling real wages is a problem in the US as well – not just Australia.
The higher-than-expected readings battered Wall Street share prices – the Nasdaq fell 3%, the S&P 500 slipped 1.4% and the Dow traded down 260 points or 0.8%.
The big fall in the value of the Nasdaq leaves it down more than 27% year to date and 30% since its all-time high last November.
Tech shares struggled on Nasdaq. Meta Platforms, Apple, Netflix and Microsoft fell 4.5%, 5.2%, 6.4% and 3.3%, respectively, as investors continued their movement out of growth areas.
Tesla shares lost more than 8% as investors worried about sales in China and Elon Musk’s non electric vehicle adventures in mining and Twitter.
Information technology and consumer discretionary sectors fell more than 3%, dragging down the S&P 500 which is now around 16% down year to date.
Our market will start in the red with ASX 200 futures showing a fall of around 35 points for the market at the opening. That was after the market struggled back into the black at the close on Wednesday for a small gain of 13.5 points, the first positive close this week.
Gold rose by around 0.6% to $US1,852 an ounce as did oil. US West Texas Intermediate Crude jumped 5.7% to $US105.45. Brent crude, the global standard, added 5.1% to $US107.69.
That helped energy stocks in the S&P 500 climb. Exxon Mobil rose 2.1%, and ConocoPhillips was 1% as was Occidental which revealed very solid profits for the quarter that justified the big investment by Berkshire Hathaway in recent months.
The Aussie dollar remained under 70 US cents at 69.32 at 6.30am.