December has not failed to surprise investors with the US employment sector outperforming expectations and sending stocks soaring. Additionally, across the Pacific the World’s second largest economy also made public interesting inflation data which is in the spotlight just as much as the US NFP. Both Chinese Consumer and Producer inflation fell below expectations. Consumer prices declined at their fastest pace in more than 3 years. China is now witnessing deflation measuring -0.5% which has not been seen since the banking crisis if we exclude COVID-19.
Last week, Moody’s downgraded China’s credit rating. Moody’s advises the costs of supporting failing local governments, state-owned companies and controlling the property crisis would pressure the economy. But the question is, what does this mean for the US and US Indices?
USA100 – Inflation To Be The Next Price Driver
The USA100 rose during the US trading session by 0.40% on Friday and by the close of day was almost 0.50% higher. The first reaction to the Non-Farm-Payroll data was negative and the instrument fell 0.38% before buyers re-entered the market. During this morning’s Asian session, the index is trading 0.10% lower but is so far forming nothing more than a retracement. Let’s discuss what the employment data means for the index as well as weak Chinese inflation.
The NFP confirms the US has 199,000 more employed individuals compared to the previous month, which is 15,000 higher than expected. However, the main shocks came from the Average Hourly Earnings and the Unemployment Rate. The Unemployment Rate declined from 3.9% to 3.7% which is considerably low considering the restrictive monetary policy. The Hourly Earnings doubled from 0.2% to 0.4%. The employment data has both positives and negatives for the stock market. However, in the past 2 years, higher employment data has meant a poorer stock market, which was not the case on Friday.
The better-than-expected employment data indicates an imbalance within the employment sector which triggered higher wages. These factors can contribute to higher consumer demand, higher investor demand, and a better performing economy. All these factors are positive for the stock market in general. However, there is a negative side also. The positive data has lowered the possibility of a nearer interest rate cut. Previously, market participants predicted a “cut” to come as early as March, but the employment data again points to “higher for longer”. The CME FedWatch Tool now has virtually no possibility of a cut in December, January and February, and now indicates a “pivot” in May 2024.
The question is, is the USA100 overpriced considering the new reality? This is something which will become clearer during Wednesday evening’s Federal Reserve Rate Decision and Press Conference. If the Fed President, Jerome Powell, suddenly becomes more hawkish and pushes a pivot further in the future, stocks can correct. Technical analysts also advise the stock market may fall into a wider price range until further clarity from the Fed.
Technical analysis shows the USA100 trading within a short-term bullish trend, but also at a significant psychological price. The asset has failed to break above this level on the past four attempts as investors fear the asset is trading above its intrinsic price. Therefore, the USA100 will require a stronger price driver. This potentially could come from tomorrow’s Consumer Price Index (inflation rate). If the CPI reads lower than 3.1%, ideally 2.9% or lower, the index could experience another surge in investor demand. However, if inflation reads 3.1% or remains at 3.2%, investors may be discouraged.
Tomorrow’s Inflation: The Key to the Unstoppable US Economy!
As the world continues to navigate the economic challenges brought on by the global pandemic, all eyes are on the United States and its recovering economy. Amidst rising prices and inflation concerns, one question seems to be on everyone’s mind: How will inflation affect the US economy? The answer may surprise you – inflation may actually be the key to an unstoppable US economy.
But before we delve into how inflation can benefit the US economy, let’s first understand what inflation actually is and how it impacts everyday life.
Inflation is the sustained increase in the general price level of goods and services in an economy over a period of time. In simpler terms, it means that the purchasing power of a currency decreases as prices of goods and services increase.
For example, if a cup of coffee costs $2 today and the inflation rate is 2%, then in a year, that same cup of coffee will cost $2.04. This may not seem like a significant increase, but when applied to the prices of all goods and services, it can have a significant impact on the economy.
Inflation and the US Economy
The US Federal Reserve uses monetary policy to manage inflation levels in the economy to ensure stable prices and a healthy economy. The target rate for inflation in the US is around 2%, and for the past decade, it has been consistently below that target.
However, in recent months, inflation has been on the rise, reaching 5% in May 2021. This has caused concern and uncertainty amongst consumers and businesses alike. But despite the initial worries, experts suggest that this rise in inflation may actually have positive long-term effects on the US economy.
The Key to Economic Growth
Inflation can act as a catalyst for economic growth by stimulating consumer spending, encouraging businesses to invest and hire, and increasing wages for workers.
When inflation rises, consumers tend to spend more money in anticipation of future price increases. This increased demand for goods and services can lead to higher production levels, which can, in turn, create more job opportunities and boost economic growth.
Moreover, higher inflation rates can also encourage businesses to invest and expand their operations. As the cost of borrowing increases, businesses may find it more financially beneficial to invest in their growth rather than paying higher interest on loans. This results in more job opportunities and economic activity, further driving the economy forward.
Inflation also leads to an increase in wages for workers. With rising prices, companies may have to offer higher salaries to attract and retain employees. This not only benefits workers but also boosts consumer spending, which further fuels economic growth.
Benefiting from Inflation
With the right steps, you can take advantage of inflation to improve your own financial situation. Here are a few tips to help you make the most of rising inflation.
1. Invest in Asset-Backed Securities – While inflation can cause the value of currency to decrease, it causes the value of assets, like real estate and stocks, to increase. Consider investing in these asset-backed securities to protect your wealth from the effects of inflation.
2. Diversify your Investment Portfolio – Diversification is crucial in any investment portfolio to minimize risk. With the rise in inflation rates, it is wise to consider diversifying your investments into different asset classes and industries.
3. Pay off Debt – While inflation can be beneficial for borrowers, it can be detrimental for those incurring debt. As the value of currency decreases, the value of the debt remains the same, effectively making it easier to pay off. Consider taking advantage of this by paying off high-interest debts sooner rather than later.
4. Negotiate for a Higher Salary – With inflation, employers may be more open to discussing salary raises. If you feel your current salary does not reflect your contributions, it may be a good time to negotiate for a raise.
While inflation may seem like a cause for concern, it can actually be a key to an unstoppable US economy. By stimulating spending, encouraging businesses to invest and hire, and increasing wages for workers, inflation can help boost economic growth. As individuals, we can also benefit from inflation by making wise financial decisions and taking advantage of the opportunities it presents. So instead of fearing inflation, let’s see it as the fuel that can drive the US economy to greater heights.