This week was one for inflation data, in particular from the US, as the market continues to try and interpret whether we have reached the terminal Fed Funds rate for this cycle. Fortunately or unfortunately, depending on how you look at it and are positioned, the data came out stronger than expected. Firstly we had the producer price index, which measures the price changes of goods bought and sold by manufacturers. This came out stronger than expected, posting a year on year figure of 2.2% which compared to the consensus forecast of 1.6%. This was the third consecutive rise which we have seen.

Core PPI, meanwhile, which excludes the more volatile food and energy costs, also rose more than expected, posting a rise of 2.7% year on year compared to a consensus forecast of 2.3% and previous reading of 2.5%. The US inflation rate remained steady at 3.7% year on year to September. This was stronger than the consensus forecast of 3.6%. The higher reading was blamed on energy prices not falling as sharply as expected. This was reflected in core inflation, which was bang on the consensus forecast of 4.1%, versus the August reading of 4.3%.

Whilst there was little change in interest rate expectations, it did cause some volatility in bond markets. The US 10 year Treasury yield, for example, rose above 4.8%, as the market interpreted the data as meaning that interest rates would remain around their current level for longer. This also led to a further un-inverse of the Treasury yield curve. The market has subsequently settled, however, with the 10 year yield at c.4.63% at the time of writing.

In the meantime focus appears to be increasing on liquidity. Research conducted shows that bank credit in the US is now contracting compared to a year ago. At the same time, research from the Federal Reserve Bank of San Francisco shows that the US consumer has almost exhausted all of the excess savings which they were able to accumulate during Covid due to the stimulus which was provided and quite simply the inability to spend. This is all coming together at a time when the interest rate on credit cards is at an all-time high, being in excess of 22%. It would therefore be fair to assume that that the US consumer could be coming under some pressure regarding their disposable income levels and spending power. To assume can prove a dangerous thing to do, but something to watch in terms of the impact this would potentially have on the economy all the same.

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