Markets fail to hold their inflation-led gains

Declining US inflation helped ease fears around Fed tapering. However, with expectations of persistently elevated prices, that market rally appears to have lost its legs already. In the UK, mining stocks have lagged as commodity prices weaken.

• US inflation-related boost fades for US and European stocks
• CPI declines could represent top for inflation, yet prices likely to remain elevated
• Miners on the back foot as commodities weaken

Global stocks have failed to maintain their inflation-fuelled gains, with the DAX providing the only area of strength as UK and US indices lose ground. The release of US inflation data provided some respite for the Federal Reserve today, with monthly inflation falling to the joint lowest level this year. The big question today is whether the decline in both core and headline inflation marks the beginning of the end for ‘transitory’ above-target pricing as alluded to by the Fed. The sky-high PPI figures do continue to highlight underlying inflation across factory inputs, yet we are starting to see the impact lessen for consumers. 
The underlying breakdown does highlight used cars as one of the largest drivers of disinflation in August, which has and will probably remain something the Fed will be willing to overlook as a justification of changes to monetary policy. With underlying asset prices and transportation still elevated, there is little reason to believe we will see inflation swiftly return to an acceptable level. Thus while we initially saw markets spike on the prospect of a more patient Federal Reserve, we have since seen traders realise that today’s data is unlikely to push the Fed to change course.

The prospect of lower inflation pressures has sparked a fresh move lower for commodity prices today. Sharp declines across the likes of Palladium, Iron Ore, Platinum, and Copper have sent miners lower, to the detriment of UK markets in particular. Bulls will hope that Joe Biden’s plan to ramp up infrastructure spending will help drive asset prices upwards once again. However, with Chinese growth slowing, we are starting to see some of the upside throughout the sector ease somewhat.