Following the positive surprise in US inflation, chances of a precipitous decline are also increasing, according to a report by international brokerage Morgan Stanley.
Both the headline (8.3%) and core inflation rates of the US CPI release were clearly higher than expected compared to expectations (6.3%). The Nasdaq fell 5% and Fed Fund Futures now discount at least a 75 bps hike at the next FOMC on September 20-21 and a non-negligible likelihood of a 100 bps boost, the Morgan Stanley report stated.
This unexpected development swiftly revealed recent shifts away from the US dollar and toward risky assets.
Morgan Stanley said, “For our coverage markets we think the chances of a sudden downside dislocation are also rising, We recommend continuing with a broad UW Tech, Semi and Internet stance and expect near term further declines away from our June 2023 base case targets and towards our bear case targets, particularly for MSCI EM (890 or 9% downside), Hang Seng (17,000 or 12% downside) and MSCI China (55 or 15% downside).”
According to Ritika Chhabra, an economist and quantitative analyst at Prabhudas Lilladher, US inflation increased in August, rising to 8.3% y-o-y from the expected 8.1%. Due to a significant reversal in energy costs, the CPI index climbed 0.1% month over month while economists had predicted a 0.1% decrease.
The high cost of food, housing, transportation, and other services is further evidence of the high consumer demand and price pressures in the service sector.
Ritika Chhabra predicted that the Fed will likely raise interest rates by 75 basis points at its upcoming FOMC meeting on September 21 due to inflation being ‘stickier’ than predicted.