Jump to content

How Does Inflation Affect Markets?

Recommended Posts

inflationary markers illustration

JUL 18, 2022

How Does Inflation Affect Markets?

BY: FRANK KABERNA | Tastytrade

The highest inflation measure in more than 40 years has left many markets in utter disarray: Nasdaq is at its lowest since 2020, interest rates are at their highest since 2007, and the US dollar is the strongest it’s been since early August.*

SFX / Small US Dollar Index Historical Prices



Though forex markets pose the largest extremes - EUR/USD lowest since 2002 and JPY/USD lowest since 1998 - inflation affects interest rates more than any other asset class.

How Inflation Affects Interest Rates and the Fed

Extreme inflation rates are some of the top market forces that the Fed and other central banks work to mitigate outside of economic recessions. Broadly speaking, central banks raise interest rates when inflation is high to contract the economy, slow the exchange of money, and reduce prices for goods and services; conversely, rates are cut when inflation is low to inspire economic growth.

S2Y / Small 2 Year US Treasury Yield Index Historical Prices


The rise in inflation has played a significant role in US interest rates’ surge from near zero to multi-year highs; however, the Fed can only go so far in defending against its one major foe, inflation, without awakening the other, economic recession.

How Inflation Affects US Dollar and Exchange Rates

In a vacuum, rising inflation results in that region’s currency declining relative to foreign ones. In this more nuanced environment, US inflation and dollars are traveling in the same direction as the former creates fear and the latter acts as a flight-to-quality asset.


Currencies are a game of relativity, so some currencies must perform positively even in an inflationary period. Since the United States is at the forefront of hiking interest rates in an effort to combat inflation, its relatively higher rates are translating to higher USD prices. (Relative interest rate values between two regions commonly translate directly to their relative exchange rate performance - higher rates means appreciating currency.)

How Inflation Affects the Stock Market

This leaves the stock market in an even more opaque position. While high inflation can mean higher interest rates that contract the economy moving equity valuations lower, at some point the stock market might slide enough to constitute an economic recession warranting lower interest rates. Such is the balancing act that faces the Fed ahead of what could be the most important rate decisions in decades.

Traders have a balancing act of their own to deal with as stock, bond, and forex markets all pose historical extremes: do you go with or against it?

Link to comment

Soaring Inflation has caught out the central banks. They know the key causes of inflation, primary start point is the MONEY SUPPY LEVELS, as I have discussed in my previous blogs.

ECB is in a hard place trying to juggle its southern member states mega-debts. So increasing rates as needed to control inflation (like other central banks have started to act on ), the ECB is very slow to act, afraid of this looming problem of servicing debts. They will suffer worse problems down the road and Italy will suffer a lot more , along with Germany ( the member that is financing the southern states debts indirectly via the Target2 system of the European Union members. It is similar to the old Soviet Union accounts system (among its states), and look what happened to them  -  collapsed. Similar fate for the EU down the line?

Central banks have enticed every one ( & all entities )  to borrow like mad because of "ultra cheap rates". That is the madness because rates have to go up at some point, especially having kept them so ultra low for so long. It is not natural economics. They will not be able to control the debt-implosion as they have assisted in creating the debt mountain, in attempting to "solve the economy". IT PROBABLY DOES NOT OCCUR TO THEM OR OTHERS THAT MAYBE THERE ARE OTHER KEY FACTORS THAT NEEDED TO BE SOLVED INSTEAD. WE HAVE GOTTEN INTO THE ADD-ON-LOANS, LOWER & LOWER RATES (EVEN NEGATIVE ) MEGA QE, AND LOWER AVERAGE GDP GROWTH DWINDLING ECONOMIC CYCLE. ISN'T MONETARY THEORY GREAT!!!!!!!! If you think "yes" seriously then I do not know why, when you look at all the failures using this theory, time after time, after time. Same old practices, same old "solutions" hence the same old problems delivered again.

Now we have the everything bubble period where the bubbles will burst one by one over time.

More generally, Jeremy Grantham has interesting points going forward at:


  • Like 1
Link to comment

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
  • General Statistics

    • Total Topics
    • Total Posts
    • Total Members
    • Most Online
      10/06/21 11:53

    Newest Member
    Joined 25/09/23 21:12
  • Posts

    • Thanks THT. Great data. Pity Brokers do not have software of this calibre that would help traders a lot more, and quick work Price / Time charting. They offer the standard tools.  
    • Hi Skyreach, Thanks for the comment Yep, most charting software does not do it right, this is purely down to the SCALING of computer screens and the software - there is a solution though The perfect way is to find out the scaling for the market you're looking at (they are ALL different) - If you take the SP500 as an example and I think I showed this on my "Are the markets random" thread, the High of Jan 2022 to Oct 2022 was a PERFECT 1 x 1 down angle in terms of Gann - the scaling formula is EXACTLY the same scaling for UP angles Gann angles aren't the be all and end all as they have there limitations but you can use them for certain things - What Gann did was right specific courses for huge amounts of money with confidentiality clauses that explained exactly what the markets were/are doing, those courses have remained hidden from the public, with only a tiny amount of evidence as to what was going on - BUT, Gann was talking about planets and planetary positions on charts in relation to prices and his Gann angles, were approximate planetary lines for the general public to use, not precise, but good enough as the angles are based on %'s of the circle See the following chart: DJIA from 2009 - People would have writen off the 1 x 1 angle after 2011, but look at it in 2022 perfect example of price and time balancing - this is a perfectly scaled chart and angles Notice: the 1 x 1.5 angle (never talked of of published on charting software) it was effective throughout and ran through the 50% level of the "covid" plunge EXACTLY This chart is the DJIA from 1982 to 2000: The 1 x 1 forecast and timed the big 2000 highs, notice the support it provided in 1987+ and notice that the 1.5 x 1 angle ran right though the 50% level of the 1987 crash - in just 2 charts we've seen the 1.5 angle split major crashes precisely and exactly to the 50% level So to come back to your comment about scaling etc and again I've shown this in "Are markets random" thread, but didn't highlight it - If you find a well defined market swing of a number of weeks or months as shown in the chart below - box the swing, split it proportionally into 25%'#s draw angles to intersect those 25%'s as shown = YOU WILL HAVE A PERFECTLY SCALED ANGLE FOR YOUR COMPUTER SCREEN AND CHARTING SOFTWARE  As long as you don't change the scaling on the chart by adding or reducing more price bars etc it will be accurately scaled, you can then COPY the angles and move around the chart - On my charting software I look back over 6 months, if I changed that to say 9 months then the scaling would change and the angles created on the 6 month basis would not be to scale, so as long as i keep the look back to 6 months any angles created will be perfectly scaled etc My software also allows me to view the angle on different timescales without moving it I mentioned planets above Not shown on the chart is the Mars/Jupiter combo at the 2009 low - the SP500 stopped dead at 666.79 points  - the Mars/Jupiter line was at a longitude of 307 degrees on a circle of 360, add 360 to 307 and you get the value of 667 = which was the value in points at which the SP500 "suddenly" stopped dead at and turned around!  This chart proves the conjunction value of mars/jupiter: The first chart is Gann's 1948 Soybeans charts shwoing Mars and Jupiter conjunction at the HIGH Then this is Mars/Jupiter conjunctions in the SP500 from 200 high - not all timings are significant but some are Here's, the trendline as a line from the 2000 high - notice that in 2018 it caught the high around the conjunction date - the thing to consider here is like the 2009 low, PRICE was 2872, the 2018 conjunction was the 8th conjunction since the 2000 high - 8 x 360 = 2880 degrees from the 2000 high = 8 points from perfection As we can see when Mars/Jupiter time and price balanced, the market dropped - only a minor drop in the grand scheme of things, but it did exactly as Gann said it would, trend reversal So although Gann mentioned his gann angles, really was he was saying was "Planetary lines" - which is exactly why when we trade gann angles, they often don't work that well, because we're trading them with the wrong scaling, the wrong reasoning and something else is creating the lines and angle of them, that most people are oblivious to That being said, people can still trade the steeper Gann angles from either the box method of creating them or the proper scaled method of knowing the points per bar figure - markets above the steeper angles often keep on rising  THT
    • Zscaler Inc., Elliott Wave Technical Analysis Zscaler Inc., (ZS:NASDAQ): Daily Chart, 25 September 23 ZS Stock Market Analysis: We have been monitoring this stock as we were mainly looking for continuation higher after what seemed to be an initial move to the upside followed by a corrective downward move. At this stage the main scenarios are two. Either we just made wave (i) of {c} and we are looking to resume higher or else we’ve had a short wave {c} and we could be continuing lower.   ZS Elliott Wave Count: Wave (ii) of {c}. ZS Technical Indicators: 20EMA as support.   ZS Trading Strategy: Looking for longs into wave (iii). TradingLounge Analyst: Alessio Barretta Source : Tradinglounge.com get trial here!         Zscaler Inc., ZS: 4-hour Chart, 25 September 23 Zscaler Inc.,Elliott Wave Technical Analysis ZS Stock Market Analysis: Looking for a potential three wave move into wave (ii) to then have additional confirmation of upside resumption. We currently stand at the 50% retracement, with invalidation below wave (i).   ZS Elliott Wave count:  Wave (ii) of {c}. ZS Technical Indicators: Between averages. ZS Trading Strategy: Looking for longs after upside confirmation.
  • Create New...