Consumer inflation expectations put pressure on stock markets
Wall Street ended sharply lower on Friday, erasing much of its previous day’s gains amid concerns over inflation. The University of Michigan consumer confidence index showed rising inflation expectations for the coming years, raising fears of a tougher stance from the Fed. The median one-year inflation forecast rose to 5.1% in October from 4.7% in September, while the median five-year inflation forecast, which had fallen to 2.7% in September, rose to 2.9% in October (corresponding to the July-August level).
Fed governors focus primarily on long-term expectations, not short-term expectations, but research by the San Francisco Fed this summer suggested that in an environment of high inflation (as is the case now), one-year expectations could influence wages, and Fed officials are currently concerned about the price-wage loop.
These inflation expectations have therefore reinforced expectations of a rise in Fed rates. The probability of two more rate hikes of at least 75 basis points by the end of the year thus fell from 61% to 69%, which strengthened the dollar and pressured bond and equity markets. Friday.
Russell 2000 daily price chart – key levels