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The Secrets Of Inflation

On Tuesday night equity indices globally fell by more than 2% with the largest drop in ISA indices dropping by 4%, This was the fifth largest fall in a day. All this was triggered by USA CPI coming at 0.2% higher than estimates. In a normal period, this would have been ignored by the equity markets but this is not a normal period.

Before the data release, there was a 4 to 5 % rise in all equity markets on a presumption that the incoming data would confirm the inflation peak. And this led to many leveraged ETFs receiving a large inflow along with the active bullish derivative position.

But in all this, two data points indicated otherwise. First was that during all the rising days' MOC ( Market On Close) flow was negative, this would not occur until it was just a bounce. The second was that on Monday both VIX and USA equities close positive instead of closing in opposite directions.

The release has not only confirmed that inflation is not at its peak but the details of the contribution were even more surprising. The highest contributions came from food, new vehicles, and rent. The food component grew at the fastest rate since April 1979 and the rental component increased by the biggest monthly change since 1991. Though the energy component fell but not by the amount it was estimated to.

This might have resulted in a peak for the equity indices more than inflation. But the largest impact the data had was in Fed Swap Rate markets where 30% of odds are favouring a 1% rate increase during the 21st September FOMC meeting.


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