US Inflation At 8.36% With Federal Reserve In Catch Up Mode

Industry News

& Articles

US Inflation At 8.36% With Federal Reserve In Catch Up Mode

  • Dow Jones is off 7.29 percent over the past 5 days and 16 percent year-to-date
  • S&P 500 closed 9 percent lower in the past 5 days and down 21 percent year-to-date
  • ASX300 is down 322 points, or 4.6 percent, including a decline of 8.3 percent over the past 5 trading days
  • GDP growth and corporate earnings drive share prices, while interest rates drive PE ratios
  • Prudently managed companies will continue to grow through the economic cycle, despite short term fluctuations in the economy, brought about by higher interest rates, related to inflation spikes.

The era of free money is at an end

The US Federal Reserve looks set to continue with its higher interest rate policy this week with capital markets braced for half a percent to three quarters of one percent rate rise, in response to runaway inflation. The most recent US inflation data showed US consumer prices climbed 8.36 percent year on year in May, the fastest increase since 1981.

The magnitude of this rise caught many market participants off guard. There is a fear that the US Federal Reserve has not anticipated this rapid turnaround in consumer prices, especially after an absence of inflation throughout much of its Quantitative Easing (QE) monetary policy program which officially commenced 2010. QE is the Central Bank policy of buying government bonds from pension funds, banks and other financial intermediaries, with the effect of pushing up the price of bonds. Higher bond prices result in lower bond yields, which are the benchmark for interest rates in the broader economy. This policy saw bond yields, and interest rates generally, fall to unprecedented levels, never seen before in history. In other words, QE, on the scale launched by Central Banks around the globe, was an experiment. Interest rates fell to zero, in many economies. The other effect is that the quantity of money also increased, which had the effect of stimulating business investment and household consumption, again to levels rarely seen in history. Under these circumstances, economic theory tells us that strong growth in economic output and wages will follow. However, these circumstances are also a firm primer for inflation. Interestingly, that did not occur, at least until now.

So, while the decision to inject low-cost funds into the economy is not a particularly difficult decision, the timing and velocity of its withdrawal, is not so straight forward. Businesses, consumers, and governments can easily become ‘addicted’ to free money. It appears that this is the situation facing the global economy at present, as Central Banks around the world begin to withdraw this unprecedented level of economic stimulus. Hindsight is a wonderful thing because everything is obvious once it has already happened. It now seems that the Fed and other Central Banks have painted over rust for the past few years with the prolonged QE policy stance, and it is only now that the lasting effect of this monetary stimulus is having a debilitating impact on the global economy and global markets, through runaway inflation.

Market Impact

The response by equity markets to significantly higher inflation prints coming out of the US and Europe has been swift.

On Monday night in New York the Dow Jones was off 876 points or 2.79 percent and is down 7.29 percent over the past 5 days and 16 percent year-to-date. The S&P 500 closed down 151 points or 3.88 percent on Monday and is off 9 percent in the past 5 days and down 21 percent year-to-date. The sell-off is widespread in that 495 of the 500 companies making up the index declined on Monday. Similarly, the technology-laden NASDAQ was down 531 points or 4.68 percent.

The US 30-year Treasury bond yield moved has now moved to 3.42 percent, the highest since 2011, and has been steadily rising since March 2020.

The Australian equity market has followed global market trends and today the ASX300 is currently down 322 points, or 4.6 percent. This includes a decline of 8.3 percent over the past 5 trading days.

The Future

Interest rates will normalise, and global QE will end. There will be pain as the world and global markets transition from this state to more normal market conditions and circumstances. How long this will take and how much further markets must fall is unknown. The 30-year US Treasury yield is currently sitting at 3.4 percent, compared to 1.8 percent in December 2021. The long run average 30-year Treasury yield is 4.8 percent, implying that interest rates have further to rise, based on historical inflation levels, compared to current readings. A recent opinion poll conducted by The Washington Post and George Mason University found that most Americans expect inflation to worsen in the coming year. However, an opinion poll is no substitute for thought.

The market will ultimately follow the economy, not the interest rate or the inflation rate. The state of the economy drives corporate earnings, as measured by Gross Domestic Product (GDP). Corporate earnings are the single most important driver of a company’s share price, followed by interest rates, which ultimately drive PE Ratios.

Despite short term market fluctuations in market sentiment and economic setbacks that result in lower share prices, GDP has grown consistently throughout history. This shows that economic growth isn’t an accident or about luck; it’s how the world works. This implies that companies which can withstand higher interest rates, with prudent debt levels, supported by strong cash flow and which enjoy pricing power through favourable market positioning, and owning privileged assets, backed up by exemplary customer service, will do well, regardless of short-term fluctuations in economic growth, interest rates or inflation.

Accordingly, investors today should spend more time thinking about the valuations of individual stocks in their portfolio and worry less about the overall state of the market, when making key long term investment decisions. The crowd doesn’t make money, individuals do, while independent thinking will always outperform the herd mentality.

The current situation requires a mix of patience and opportunism, as Central Banks work through the challenges brought about by a confluence of global events presently gripping markets as they do everything in their power to avoid a global recession.

Louis Mosmann

Louis Mosmann is a Private Wealth Client and Research Assistant at KOSEC- Kodari Securities. Louis covers macroeconomic events, global markets and ASX300 company announcements, allowing clients to make more informed investment decisions. Email Louis at

Comment on this company

Latest Stories

Sandfire Announces 147Mt Mineral Resource Estimate For MATSA Mine Project

Sandfire today released an update of the Measured, Indicated and……

Piedmonts North American Lithium Mine To Restart In First Quarter Of 2023

Piedmont has confirmed the restart of spodumene (lithium) concentrate production……

Collins Foods KFC Brand Strength Boosts FY22 Sales, Profits and Dividends

The financial year ended 1 May 2022 saw Group revenue increase by……

More for you

EVN Down On Wet Weather Impacts And COVID Related Staff Absenteeism

COVID related staff absenteeism and wet weather has……

APA Group To Pay 28c Final Distribution For 6mths Ending June 2022

APA has announced a final distribution of 28 cents per stapled……

Arena REIT To Pay 4.05 Cents Quarterly Distribution On August 4

Arena REIT (Arena or ARF) is an internally managed stapled real estate Group……

Iluka To De-Merge Mineral Sands Assets To Focus On Rare Earths Operations

Iluka is set to become an Australian-based critical minerals company……

US Federal Reserve 0.75% Rate Rise Is The Largest Increase Since 1994

In a decisive move that was well received by markets around the globe……

RIO’s New $4.3B Gudai-Darri Mine Delivers First Iron Ore Shipment

RIO’s first greenfield mine site in the Pilbara in 10 years has delivered……

KOSEC Terms & Conditions

Kodari Securities Pty Ltd (CAR 399556) trading as KOSEC is regulated by the Australian Securities and Investment Commission (ASIC). KOSEC is a financial services company and any information provided by its platforms, portals, reports and documents is protected by copyright. Any unauthorised production of this information is prohibited.
KOSEC reserves the right to change or remove any information provided on our website, reports or any documents including these terms and conditions at any time without notice. The change or modification to the terms and conditions will be effective immediately upon posting an updated version on our website, necessary platforms and documents. It is recommended that you review the information provided on our website, including these terms and conditions frequently for any changes.

KOSEC provides general advice only. The information provided is of a general nature only and does not take into account your individual objectives, financial situation or needs. It should not be used, relied upon, or treated as a substitute for specific professional advice. KOSEC recommends that you obtain your own independent professional advice before making any decision in relation to your particular requirements or circumstances. Please make sure you read our Financial Services Guide (FSG).

KOSEC does not guarantee any returns. Past performance of any product discussed is not indicative of future performance. (We urge that caution should be exercised in assessing past performance. All financial products are subject to market forces and unpredictable events that may adversely affect their future performance). Investing in the stock market can incur huge losses. Please also be aware that fees will incur on every transaction regardless of the performance of your investments or returns generated. Employees and or associates of KOSEC may hold one or more of the stocks, securities or investments reviewed by the company.

Your use of information from our website, reports, documents and from talking to our representatives/associates is at your risk. Under no circumstance should the investment be based solely on KOSEC information and general advice. You should seek professional financial planning advice.
KOSEC aims to maintain the accuracy of the data and information provided on this website, by using information prepared from a wide variety of sources, which KOSEC to the best of its knowledge and belief, considers accurate and does not make any representations or warranties of any kind, expressed or implied, about the completeness, accuracy, reliability, suitability or availability of the information provided.

We may at times refer to third parties, which the details of these third parties have been provided solely for you to obtain further information about other relevant products and entities in the market. KOSEC has no control over the information third parties have, or the products or services offered, and therefore make no representations regarding the accuracy or suitability of such information, products or services. You are advised to make your own enquiries in relation to third parties. Our inclusion of any third party content is not an endorsement of that content or the third party.

As a client you will be charged a yearly service fee and a set brokerage fee per transaction. Your service fee will automatically renew at the end of your agreed 12 month period at the same rate advertised at the time. Your credit card or bank account will be charged for a further year following which will again auto renew until you cancel your yearly service fee. You can cancel the auto renewal at any time in advance of the renewal date by contacting us. KOSEC is aware of the need to ensure the security of your credit card details and our payment systems are compliant with the Payment Card Industry (PCI) Data Security Standard.

You consent to receiving email correspondence from KOSEC, as well as companies KOSEC has an association with. These emails will be sent by KOSEC and third party companies. You can opt out of receiving any category of emails at any time by contacting us. We may from time to time inform you of special offers, or even ask your opinion of the services we provide, but your involvement is optional. Should you request us to do so, we will archive your details.

Indemnity and Liability
You indemnify KOSEC from all claims or threatened claims, suits, demands, damages, costs as well as including legal costs incurred in dealing with any threatened claim, expenses made by any person or corporation against KOSEC and any other amounts which is caused by KOSEC providing information, execution and General Advice.

You hold KOSEC harmless and release it from any liability in respect of any loss, harm or damage arising from a decision made by you on the basis of information obtained through the use of our portal, reports, documents or any General Advice given and any transaction taken place.

You hold KOSEC harmless and release it from any liability in respect of any loss, harm or damage arising from delays in executing orders for the client and acknowledges KOSEC makes no guarantees about the time taken to execute an order on behalf of the client. You acknowledge that KOSEC relies on third parties in providing technology and release KOSEC from any harm, loss or damage you may suffer as a result of the failure of such information technology.

Cookies and Links
KOSEC website, and its portal uses cookies, which lets us identify your browser while you are using the site or our portal. Cookies do not identify you personally. They simply allow us to track your usage patterns. If you prefer not to receive cookies, you can configure your browser to reject them or to notify you when they are being used. The functionality of the KOSEC website may be impacted if you restrict the use of cookies.

Fill up the form below and we will get back to you as soon as possible.



KOSEC’s CEO, Michael Kodari’s new book, “Stock Market Success” valued at $39.95, available at Dymocks book stores with all the proceeds going to Dymocks Children’s Charities.