In the United States, headline CPI inflation rose from 5.3% on-year basis in August to 5.4% on-year in September,
Rising inflation concerns on the back of climbing commodity prices signal mounting risks for stocks, said Chris Wood, global head (equity strategy), Jefferies. The market veteran highlighted that the expectation of inflation amid concerns of the US Federal Reserve’s tightening of its monetary policy and tapering of the bond-buying program were rising. “The US five-year, five-year-forward inflation expectation rate is now 2.36%, only 2bps below its 2021 peak of 2.38%,” Chris Wood said. A sell-off aided by tapering and inflation in the US could ripple down to global stock markets.
Inflation the rise
In the United States, headline CPI inflation rose from 5.3% on-year basis in August to 5.4% on-year in September, while the consensus expectation was of 5.3%. While the five-year, five-year-forward inflation expectation rate is now at 2.36%, Chris Wood believe a further rise could put pressure on the US Fed. “GREED & fear continues to believe that a move above 2.5% will put more pressure on the Fed in terms of being more specific about how much it is willing to overshoot 2%,” he said.
Stemming from this rise in inflation, Chris Wood sees mounting risk for highly valued growth stocks in particular. “If the trigger for the anticipated sell-off is to be rising inflation concerns and related Fed tightening concerns, a further major rise in the oil price continues to have the potential to aggravate the current inflation scare dramatically, with the major investment issue being whether energy stocks will continue to lag the commodities as a result of what could be termed the ESG effect,” he added.
Chris Wood highlighted that S&P ENergy Index has lagged the Brent Crude Oil price since the beginning of 2021. Brent Crude oil price has gone from around $40 per barrel to trade above $80 currently. The S&P Energy index has risen but has underperformed the rise in brent crude price.
Input costs increase
Apart from rising inflation clubbed with Fed tightening, Chris Wood has also flagged concern around rising input costs. “There is also the issue of souring input costs and whether corporates can pass them on,” he said. The market expert said that China’s producer price inflation has risen to 10.7% on-year in September, the highest level since November 1995 while Japan’s PPI inflation rose to 6.3% YoY in September, the highest level since September 2008, a testament to rising input costs.
The global equity strategist has also questioned how long it will take for the Fed to change its tightening stance if global markets correct heavily led by a correction in Wall Street and rising crude oil prices.