America Pops Some Tags

Fed rate hike sinks stocks

Image source: Wikimedia Commons

What's going on?

US retail sales grew by more than expected in August, even as consumer prices saw their highest annual rise in a year.

What does this mean?

Strong online sales and decent demand for autos helped American retail sales overall increase by 0.4% last month, twice as much as economists had predicted. That’s encouraging: blockbuster consumer spending propped up overall US economic growth last quarter, accounting for around 70% of it. 

Solid demand allowed the prices of everyday goods and services to rise 0.3% in August, leaving them 2.4% higher than a year before. But while investors expect inflation to continue to rise in the coming months, America’s central bank still looks set to cut interest rates again next week in a bid to keep the country’s economy on track.

Why should I care?

For markets: A rate cut is priced in.

Inflation is likely to tip above the Federal Reserve’s target level next year as fresh US trade taxes make Chinese products more expensive Stateside. Ordinarily, a central bank would respond by raising interest rates to make borrowing more costly and keep price rises from getting out of control. But with the trade war weighing on the global economy, financial markets have already adjusted to reflect investors’ 84% confidence that the Federal Reserve will instead cut rates on Wednesday. Encouraging more borrowing may be the only way to preserve the country’s longest-ever period of economic expansion.

The bigger picture: Markets just “rotated”.

The value of a group of “safe haven” US government bonds dropped by its most since 2016 last week, while that of the smallest 2,000 companies on the US stock market rose 5%. A boost for riskier “value stocks”, whose health is linked to that of the economy, came at the expense of previously hot “momentum stocks”, which typically perform better when bond prices are rising. All this may indicate investors are feeling more confident about the future – but the sudden nature of the rotation has unnerved some.

Originally posted as part of the Finimize daily email.

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