US stocks fell on Tuesday amid less-than-expected inflation growth. Investors apparently perceived the data as a sign that the Fed will become more flexible on giving up stimulus, which also led to the decline in dollar and Treasury yields.
Yields on 10-year bonds fell by 6 basis points to 1.26%, narrowing the gap between short-term and long-term US debt. At the same time, the financial, industrial and energy sectors drove the S&P 500 down even after the US Department of Labor reported that CPI rose 0.3% since July. The benchmark index was down 0.55% yesterday and has rolled back by 1,100 pips since the beginning of the month.
Blake Gwinn, strategist at RBC Capital Markets, said he disagrees with the view that the Fed will take a flexible stance as he believes that it will begin cutting bond purchases in November or December.
But the CPI data confirms the earlier opinion of Fed officials and Biden administration that high inflation will be temporary. In any case, the report may help address the bitter criticism that President Joe Biden's economic stimulus is causing devastating inflation.
One thing is clear. The global stock market is facing a headwind amid fears over the Delta strain and the risks of increased inflation, fueled by supply disruptions related to COVID-19.
In an interview with Bloomberg, JP Morgan strategist Elyse Ausenbaugh said: "I don't think this changes much for the Fed. By the end of next year, this 4-5% inflation will decline to more moderate levels."
Other important events this week are:
- report on China retail sales, real estate prices and industrial production (Wednesday).
- data on base CPI (Wednesday);
- speech of ECB chief Christine Lagarde (Thursday);
- report on US jobless claims (Thursday);
- data on EU CPI (Friday).