The interannual inflation rate in the United States stands at 4.2%
Since last March, there have been fears over a possible increase in inflation settling into the financial markets, causing an increase in the yields of the US bond and sharp falls in the financial markets. Doubts about this possibility have not completely disappeared, as we have noted in earlier articles this week, but it was finally confirmed during the day yesterday.
Perhaps this was the most anticipated data in recent months and after knowing the data of the interannual CPI in the United States from Wednesday 12, May, the fears were fulfilled after the interannual CPI stood at 4.2% compared to 3.6 % expected by the market consensus, which represents a CPI increase from 2.6% to 4.2% in just one month.
This strong increase in inflation can be explained by the different economic measures taken in the United States to face the pandemic, both by the Federal Reserve and by the program approved by Joe Biden last March for an amount of $1.9 billion of direct aid through stimulus checks to American households. These policies, together with the advanced vaccination programme, have strongly propelled the American economy on the path to economic recovery, after the crisis caused by Covid-19.
This upturn in inflation rekindles expectations that the Federal Reserve will decide to start withdrawing its stimulus programs, in turn increasing interest rates, thus directly impacting both the bond market and the equity market.
A rise in interest rates would directly affect the bond market, as new bond issues would have to offer a higher yield, so outstanding bonds would have to lower their price even further to compete with that yield. We must not forget that in the bond market, given that these are listed at a discount, an increase in profitability generates a fall in the price of the bond, while a decrease in profitability causes an increase in the price of the bond.
Therefore, with this news in mind, yesterday's session the yield of the American T-Note registered a rise of 4.42%, thus continuing with the increases of the last week. The panic over inflation and the possible change in the current status quo continued to drag down the main stock exchanges, with declines of more than 2% on Wall Street and 2.49% in the Japanese Nikkei, therefore continuing with the declines in the selective Japanese as and as we commented on Tuesday.
These strong falls are dragging the European market in today's session, with generalised falls in the main European markets between 1.5 and 2% at the moment. Moreover, this situation has caused a strong rebound in the so-called fear index, as the VIX has gone from trading at a level close to 18 points to trading above 26 points, exceeding its average of 200 sessions.
Source: Admiral Markets MetaTrader 5. Daily chart of the VIX volatility index. Data range: from December 4, 2019 to May 13, 2021. Prepared on May 13, 2021 at 10:30 am CEST. Keep in mind that past returns do not guarantee future returns.
Evolution in the last 5 years:
- 2020: 65.09%
- 2019: -45.79%
- 2018: 130.25%
- 2017: -21.37%
- 2016: -22.90%
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