This was a terrible CPI report for risk assets, as the 10-year Treasury yield topped 4%. There was a big ‘beat’ on the headline and core CPI prints. The acceleration in services inflation is particularly worrisome for the Fed. Medical care services inflation is now coming through as expected. This was always the underappreciated factor for the Fed’s reaction function: lagging services inflation. Medical care services inflation is sticky and is reacting to the wage pressures and labour shortages with a significant lag.
This CPI report will exacerbate the risks globally. It will give another leg up to the dollar, and force other central banks such as the ECB and the BoE to hike faster to defend their currencies.
Sterling and Gilts found a bid over the last couple of days through more BoE purchases and reports that Liz Truss would row back on the mini budget. But the pressure on sterling may not subside unless the BoE begins to outpace the Fed in terms of rate hikes. However, the UK housing market is already deteriorating, with the latest RICS survey now pointing to a decline in house prices over the next three months and year ahead.
A bigger risk may still lie with Japan. The yen slumped past 147 after this report, which will lead to more FX intervention. But price pressures continue to build in Japan: the y/y for the SRI-Hitotsubashi Consumer-purchase Price Index accelerated to 2.54% in the week to October 11th and is now approaching the 2008 highs.
Finally, China remains a very concerning prospect for the stock market. Semiconductor export controls have hit technology stocks, but the travails of the property market are morphing into a banking crisis. The Hang Seng Mainland Properties and Banks indices have extended their YTD declines to 57.1% and 22.0%, respectively.
