Bonds, stocks, bitcoin, shrug off strong inflation numbers, big rally on weaker dollar

A fall in the US dollar from a 32-year high against the yen saved stocks and cryptocurrencies from another inflation-driven sell-off in a sharp intraday reversal.

Inflation is evolving from a food and energy problem to a core problem, spreading to several goods and services that consumers regularly buy, such as medical services, insurance and housing.

US headline inflation for September rose at an annual rate of 8.2%, slightly below the August figure but ahead of market expectations.

Core inflation, which excludes volatile food and energy components, rose 6.6% in September, up from 6.3% in August and well above market expectations.

Price increases were widespread, led by auto insurance (+1.6%), accommodation (+0.8%) and medical services (+0.8%).

“The savings consumers may have seen in home gasoline and energy costs from July through September will be offset by rising overall housing costs,” Kurt Rankin, senior economist at PNC Financial Services Group, told the International Business Times in a E-mail.

September consumer inflation numbers are in line with producer inflation released yesterday. It also showed that inflation remains “unacceptably” high, as FOMC members had expected at the September minutes meeting.

Wall Street didn’t like what they saw in the numbers. In the debt market, bonds sold off in early morning trade, with the benchmark 10-year Treasury yield exceeding 4%.

In the FX markets, the US Dollar Index rose towards the 114 level.

Equities fared even worse as all major stock indices opened nearly 2% lower.

Bitcoin suffered even more significant losses, falling close to $18,300.

But things turned towards the 112 level late Thursday morning on a fall in the US Dollar Index. This sparked a rally in high-tech, large-cap stocks, which are generating significant revenue and gains from overseas markets, sending all major indices up nearly 3%.

Bitcoin raced back above $19,000 again.

Still, the rally in stocks and cryptocurrencies could be short-lived as interest rates rise from here.

“Federal Reserve tightening plans remain aggressive,” Rankin said. “Their data dependency message, in particular, will require core CPI inflation to ease before considering a course correction.”

And that would require significant rate hikes to cool the labor market and slow wage growth.

“Unfortunately, wage growth in the US economy has already stalled while inflation has remained stubbornly high,” Rankin said. “The Fed’s Demand Destruction goals will only weaken workers’ bargaining positions in the labor market as consumer demand is undercut and companies see less need to hire in response to falling demand for their goods and services.”

But that would depend on fresh inflation data.

“The Fed will take an even tighter stance and tightening, especially if the Oct. 28 PCE inflation numbers come in as hot as the latest CPI numbers ahead of their next meeting on Nov. 2,” said former White House Economist Tomas Philipson. Bonds, stocks, bitcoin, shrug off strong inflation numbers, big rally on weaker dollar

Fry Electronics Team

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