Inflation

Yesterday's hotter-than-expected US inflation reading set off a rout in global stock markets. Wall Street suffered its worst day since June 2020 and losses spread through Japan, Hong Kong and Australia overnight.

Indexes for rent, food and medical care all rose to such a degree that they offset a 10.6% decline in the price of fuel. As the FT's Robert Armstrong notes, there was little in the report that fundamentally changes the balance of risks facing the market, rather it extinguished what had been growing optimism that inflation was on the cusp of meaningfully receding, allowing the Fed to slow the pace of rising interest rates - a viewpoint Fed officials have been seeking to challenge for several weeks. "Tuesday’s rout looks less like the absorption of new information than a loss of naivety," Mr. Armstrong concludes.

Traders are now betting that the Fed will hike by three quarters of a percentage point when it meets next week. Pricing suggests policy rates could peak at 4.3% early next year before receding to 3.8% before the year is out. 

That would exert pressure on housing market activity through the year and into 2024. Existing home sales have now fallen for four straight months. Fannie Mae's National Housing Survey, out last week, shows a fairly rapid increase in consumers expecting prices to fall over the next twelve months.