Wall St. indices slumped after September inflation data showed persistent inflation showing no signs of abating.
The inflation data gives the Federal Reserve more reasons to continue with high-interest rate increases in its next meeting, which will take place in November. The consumer price index increased 8.2% year on year, which was slightly higher than the market's median forecast. The core CPI, which excludes food and fuel, increased by 6.6%, which was also higher than expected.
The probability of the Fed raising rates by another 0.75 points is now nearly 100%, marking the fourth consecutive increase of this magnitude in its attempt to kill inflation. The meeting minutes in September, published the day before, showed that the members of the Federal Reserve's Monetary Policy Committee are determined to continue with this pace of rate hikes in their fight against inflation, despite the risk that this means for the economy.
The other source of global market uncertainty, the British fixed income crisis, appeared to take a breather yesterday, with the UK 10-year GILT bond yield falling 25 basis points to 4.20%. The Bank of England's intervention in the market by purchasing bonds is likely the cause of this movement, though no figures have been published in this regard.
The problem and main concern in the market is that the BOE has warned that it will cease to intervene as of today, Friday, so if this occurs, turbulence may return to the British market, and this instability will be transferred to other global markets.
The problem is difficult to solve; either the Bank of England continues its purchases to support the market, or the British government issues a political statement ruling out the possibility of massive tax cuts, which appears unlikely based on recent statements by government representatives.
In this highly gloomy scenario, with no relevant economic data in the coming weeks that could give hope of a change in the direction of monetary policy in the United States, the downward pressure on risk assets, including treasuries, appears to be the dominant trend in the markets.
Sources: Bloomberg, Reuters