Sky-high inflation weighs on the Nasdaq Composite index

[ArvinIG]

The NASDAQ Composite index fell 2% today as US CPI inflation hit 7.9%, its highest since 1982. With interest rates expected to rise next week, a further correction could be on the cards.

Source: Bloomberg

 

Indices Commodities Inflation United States Federal Reserve Nasdaq Composite

 

2022 has not been kind to the NASDAQ Composite. After climbing from a covid-19 pandemic low of 6,880 points on 20 March 2020 to an intraday record of 16,212 points on 22 November 2021, it had dipped to 15,833 points by the start of this year.

And it's now fallen another 20.5% to 12,581 points today. And along the way, it’s displayed nerve-wracking volatility.

As US inflation rises, all eyes now turn to the US Federal Reserve. The higher rates go, the more the ability of the NASDAQ’s tech-heavy stocks to grow on cheap debt becomes constricted.

Nasdaq Composite: record inflation

Like the UK’s Bank of England, the US Federal Reserve is tasked with keeping the Consumer Prices Index inflation rate at 2%. After decades of economic wrangling, this figure appears to be the best middle ground between encouraging spending while maintaining currency value.

But according to the Labor Department, the US annual inflation rate in February hit 7.9%, its highest since 1982. For context, this was the year that Argentina chose to invade the Falklands.

Rising costs for energy, food and shelter drove the gains; and politically, this is dangerous for President Joe Biden, who is facing mid-term elections in November. These sectors are unavoidable rises, that disproportionately hit poorer Americans with less disposable income.

The Federal Reserve is widely expected to increase interest rates as a result. Chair Jerome Powell is on the record saying he is ‘inclined to propose and support a 25-basis-point rate hike’ this month, and further that he is ‘prepared to move more aggressively’ if inflation remains stubbornly high.

However, commenting on the crisis in Ukraine, Powell said the economic outlook is now ‘highly uncertain’ meaning the Reserve had to ‘proceed carefully as we learn more about the implications of the Ukraine war on the economy.’

And far from the complacency of ‘transitory’ inflation, Powell believes that even though there is ‘an expectation that inflation will peak and begin to come down this year,’ that ‘persistently high’ inflation would mean ‘raising the federal funds rate by more than 25 basis points at a meeting or meetings.’

Oil prices are a particularly sore point for Americans right now. Over the past 12 months, gasoline has increased by 38% and natural gas by 23.8%. As the Biden administration has now placed an embargo on Russian oil, which previously constituted 8% of its imported oil, further increases seem inevitable.

And Kpler analyst Matt Smith warns ‘crude is used as an input to produce all manner of products,’ and will continue to drive inflation further. For example, grocery prices are up 8.6% year-on-year, the largest annual leap since 1981.

Nasdaq Composite: rising rates

Moreover, the Ukrainian crisis is likely to send US inflation soaring further. Commodities ranging from Wheat to Gold, Palladium, Aluminium, and Nickel are all at or close to multi-year highs, as a combination of sanctions and blockades restrict exports from the war-torn region.

AllianceBernstein's Eric Winograd says ‘the numbers are eye-watering and there is more to come…the peak in inflation will be much higher than previously thought and will arrive later than previously expected.’ Meanwhile, Wells Fargo's Sarah House believes ‘inflation continues on at a blazing pace…consumers and policymakers remain in a deeply uncomfortable state as a result.’

And Paul Ashworth, chief US economist at Capital Economics, argues ‘given the spike in crude oil and gasoline prices since Russia’s invasion of Ukraine, (inflation) will climb well above 8% in March.’

Wells Fargo’s Director of rates strategy, Michael Schumacher, says ‘25 basis points next week seems just about a lock…Fed’s in a tough spot. It’s getting tougher by the day. It’s hard any time, but especially when you’ve got incredible inflation, and we’ve had the supply chain issues for a while, and now they’ve been exacerbated by Russia-Ukraine.’

Barclays Chief Economist Michael Gapen believes the US will see five rate hikes this year, as ‘we certainly have stagflation influences.’ Meanwhile, Daniele Antonucci, Chief Economist at Quintet, said ‘significant pressure on the Fed to hike by 25 bps at its March meeting…to reach 2-2.5% in the US over the next two years.’

As interest rates rise, the Nasdaq Composite seems set for further volatility. And with many sources of US inflation outside of internal control, the Federal Reserve could run out of easy choices.

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Charles Archer | Financial Writer, London
15 March 2022