Bring a tin hat Mr Powell, you may need it

The threat of the Federal Reserve increasing interest rates even more aggressively than markets had anticipated post the latest US inflation report sent equities into another decline. The Federal Reserve almost primed the market for a 75 basis point rise later on Wednesday, in an apparent tip-off to the Wall Street Journal. Only days before the inflation data the Fed were guiding to stay steady at 50 basis point increases. Higher food and energy prices will likely feed through into next month’s inflation data and economists are now predicting year-on-year inflation rates could run over 9% in June. Interest rates were expected to peak around 3% next year, now the possibility of it getting to closer to 4% is on the cards.

As a result of the latest inflation data those economists who were confident that the Fed could tame inflation without driving the economy into a recession, are starting to throw in the towel on that view.

Stocks and bonds continue to be hit hard, as ten-year US treasuries have reached 3.4% and the S&P 500 enters bear market territory as defined by a 20% fall from the peak. Whereas investors have been accustomed to seeing the Fed coming to the rescue during periods of falling stock markets, with inflation rates running where they could exaggerate the falls.

Although the trend for economic data is downward the underlying US economy, at this moment in time, appears healthy and many of the signals that economists look for as an impending recession are not there. For example, employment remains strong, bank and corporate balance sheets are strong and saving rates remain high. Companies will continue to retire equity and return cash to shareholders. Together all this may assist in avoiding a deep economic recession.

So @Liam Halligan asked me on @GBNews on Tuesday, when will stocks bottom out? Possibly not yet as stocks tend to bottom out when analysts, who always remain behind the curve, start to downgrade earnings expectations. That is only starting to happen. Often stocks do also bottom at the trough of the economic cycle. At a time economic analysts are highlighting a recession, investors will be looking for a recovery. Stocks tend to rise during the recessionary period as this is also the point when central banks start to lower interest rates.

Later this week the Bank of England meet, and they are expected to raise interest rates despite the disappointing GDP report which saw an unexpected reversal in the UK economy suggesting we an ever closer to an economic recession. Output fell for the second month in a row.

Ahead of my interview on @GBNews, I spent a few minutes in the anti-room with @Nick Beighton, former Chairman of Asos. He posed a very good question, how the combined brains of the world could not anticipate shutting down the global economy and then firing in unlimited amounts of cash would not lead to rampant inflation is beyond belief?