Recent inflation data out of the US shows that consumer price activity is rising at a rate faster than previously expected. At the consumer level, all this really means is that commonly purchased items are a little bit more expensive then the were the previous month (and roughly 1.5% more expensive when compared to the previous year). But while these changes might seem minuscule and trivial, there are some very clear implications for what this means in terms of monetary policy at the US Federal Reserve.
Specifically, this means that the central bank has less reason to believe that a period of deflation will enter into the economic. When crafting monetary policy, this also means that the Fed will have a good deal more flexibility to start removing stimulus and putting an end to its historic quantitative easing (QE) programs. “The stated intentions at the Fed have already put a timetable for when this exit strategy is likely to be finalized,” said Rick Bartlett, markets analyst at Orbex . “This should send direct benefits to the US Dollar, and assets that track its value.” One of the best examples of this can be found in the PowerShares DB US Dollar Index Bullish ETF (UUP).
Trends in Different Asset Classes
These types of assets are most likely to benefit because the Fed will literally be removing the number of Dollars that are running through the system. Since there is no real reason to believe that demand for the Dollar will see any immediate changes, we will now be facing a situation where declining supply levels are met with steady demand levels. Basic economics suggests that these two trends will lead to rising valuations in the market.
But these trends will influence other markets, as well. Since commodities like gold, silver and oil are all priced in Dollars, each of these assets will start the exhibit the characteristics of their inversely correlated relationships. Specifically, this means that ETFs like the SPDR Gold Trust ETF (GLD) and the iShares Silver Trust ETF (SLV) should start to come under pressure along with the United States Oil Fund LP ETF (USO) . In the case of oil, market bearishness will also be propelled by declining demand expectations as the reduced stimulus prospects will also weigh on the nation’s potential for economic growth.
In stocks, this also creates potential headwinds for the SPDR S&P 500 Trust ETF (SPY) on a direct basis, and in the iShares MSCI Emerging Markets Indx ETF (EEM) on a more indirect basis. So here it is clear that rising inflation levels (and their influence on the actions of the Fed) will have alternate ways of impacting most asset classes. But it will be important for those with active money working in the markets to monitor these changes as they occur. The last few months of the year could prove to be a volatile time for investors, so it is best to be prepared.