The recent performance of US economic data has sparked a debate on the outlook for inflation.
Core Consumer Price Index (CPI) inflation has increased slightly, reaching 3.3% last month, which is above the Federal Reserve's target of 2%. The Core Personal Consumption Expenditures (PCE) inflation, the Fed's preferred measure, has also risen to 2.7% in September. Despite improvements from earlier in the year, this level of inflation is still higher than what has been seen in recent decades.
The employment landscape appears strong, with job growth and the ISM Services index reaching its highest level since February 2023. These indicators raise questions about whether the markets and the Federal Reserve are underestimating the resilience of US economic data and inflationary pressures. Some Federal Reserve officials have expressed concerns about inflation and suggested a shift in focus from employment to price stability.
The minutes from the Fed's last meeting revealed differing views among members, highlighting the complexity of the current economic landscape. The bond market has experienced a correction, with the 10-year yield increasing to over 4.1%, reflecting concerns about inflation and the potential for a tighter monetary policy. The Dollar Index has also increased, indicating a shift in investor sentiment towards a stronger dollar.
Despite these adjustments, US equity markets have shown resilience, reaching new all-time highs. This raises questions about investor complacency. The VIX, which measures market volatility, remains around 20, suggesting a potential disconnect between asset classes.
Geopolitical tensions and upcoming elections add further complexity to the economic outlook. The interplay between rising yields, equity market performance, and geopolitical risks will be crucial in shaping the investment landscape in the coming months.