2023-08-10 17:59:22
Düsseldorf, Frankfurt Inflation in the USA is picking up again – but only moderately, and that is good news for the recently unsettled markets, at least in the short term. US annual inflation rose in July for the first time in over a year. Year-on-year, consumer prices increased by 3.2 percent. In June, the value was still 3.0 percent, the inflation target of the US Federal Reserve is two percent.
Nevertheless, the figures were well received on the financial market: the US stock exchanges opened with profits, and the leading German index Dax also rose. Prices rose slightly on the bond market, halting the upward trend in government bond yields.
The inflation rate rose less than expected. Economists had expected a value of 3.3 percent. The fact that expectations were not met is interpreted by investors as a sign that the Fed’s rate hikes in the fight against inflation are having an effect – and that no further rate hikes are necessary.
Following the inflation data, the probability of a further interest rate hike was only priced in at less than ten percent on the interest rate futures markets, as the Fed Watch tool of the largest US futures exchange CME shows. Previously, the figure was 15 percent.
The fact that the increase in inflation is mainly due to a base effect also contributes to interest rate optimism. In July 2022, the prices had not changed, so each mini-increase results in a higher annual rate. In contrast, the monthly rate of change remained low at 0.2 percent, as in the previous month. “On an annual basis, this rate would correspond to the Fed’s target of 2 percent,” write Juliana Rack and Stoyan Toshev of Bankhaus Metzler.
Core inflation falls to 4.7 percent
Core inflation is also declining. This calculation does not include the prices for energy and food, which are particularly susceptible to fluctuations. For the year as a whole, the core inflation rate fell from 4.8 to 4.7 percent. Mohamed El Erian, chief economic adviser at Allianz, wrote on the short message service X (formerly Twitter): “The data will confirm expectations that the Fed will refrain from raising interest rates in September.”
Since March 2022, the Fed has hiked interest rates in 11 steps from zero to a range between 5.25 and 5.50 percent. In doing so, it successfully combated inflation, which reached 9.1 percent in June last year, its highest level in 40 years.
The fact that hopes of an interest rate pause are being fueled improves the situation on the bond market, which has tightened significantly in recent weeks, especially for interest-bearing securities with long maturities. Prices for long-distance bonds had fallen since mid-July and, on the other hand, yields had risen significantly again.
Bond yields recently hit nine-month highs
Yields on US 10-year and 30-year Treasury bonds rose to 4.2 percent earlier this month, their highest level since last November. In contrast, the yield on US government bonds maturing in two years remained below the annual high of 5.1 percent reached in March.
At first glance, this is also surprising for bond investors, because the significantly lower US inflation rates and the associated hope that the US Federal Reserve will stop raising interest rates should actually have increased demand for bonds and thus caused yields to fall.
US needs more money
One reason for the drop in prices on the bond market was better than expected US economic data, with the labor market in particular sending out positive signals. From the investor’s point of view, the risk of a US recession is steadily disappearing – and this means there is less reason to invest in safe investments such as US government bonds.
At the same time, the financial needs of the USA are increasing. At the end of July, the Treasury announced bond issues worth a good one trillion dollars for the third quarter. The USA has never issued so many new bonds in a third quarter. At the same time, those responsible for the bond placements in Washington emphasized that the financial requirements will probably also be higher in the coming quarters than in the past.
“If the US needs more money in the future, then the rise in yields makes sense,” said Chris Iggo, a senior investment strategist at Axa Investment Managers. This also applies because the US Federal Reserve has largely discontinued its bond purchase program and is therefore absent as a bond investor.
Fitch as “accelerator”
The rating agency Fitch also caused a stir, withdrawing the top credit rating “AAA” from the USA at the beginning of August, citing the debt dispute between Democrats and Republicans, which was only settled in June, and deteriorating financial indicators for the USA. According to Elmar Völker, bond analyst at Landesbank Baden-Württemberg, this acted as a kind of “accelerator” for the sell-off of US government bonds, which were already battered.
Most recently, hedge funds were particularly skeptical about the development of US government bonds. In the past week, they have increased their bets on further falling prices for long-dated US government bonds more than they have since 2010.
Well-known hedge fund manager Bill Ackman, who specifically bets against 30-year US bonds, explained this on the assumption that US inflation will prove more stubborn than previously thought: “I would be surprised if we don’t find ourselves in a world with permanent inflation of around three percent.”
Oil price development becomes important
Oil prices are climbing again. Since the end of June, the price of a barrel of the US WTI variety has risen by 23 percent to $84.
(Photo: Reuters)
Rising defense costs, the energy transition, deglobalization and growing labor shortages are likely to keep inflation high. According to Ackman, the Fed will then raise interest rates further and, accordingly, also allow yields on the bond market to rise.
Oil price could become a factor
Rising energy prices in particular could become an issue. Because oil prices are climbing again. Since the end of June, the price of a barrel of the US WTI variety has risen by 23 percent to $84.
Because prices were even higher a year ago, this is not yet reflected in the current inflation data. But that can change, says investment strategist Sven Schubert from Vontobel: “In the coming months, a positive inflation effect should increasingly be observed.” However, the extent depends on how long the oil price remains at an elevated level.
“At the current price level, it would take until November for petrol to have a positive impact on annual inflation again,” explains UBS analyst Giovanni Staunovo. A higher level, on the other hand, could become critical. So if oil prices were to rise more sharply, they would be on the agenda before the Fed’s September meeting of all times. Because then the central bank wants to decide on further interest rate hikes depending on the data.
More: Inflation rate in the euro area falls slightly to 5.3 percent
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