Stocks retreat from recent highs as US inflation comes in stickier than expected

New IMF report points to higher government spending across the board

I talk a lot of debt and deficits. Rachel Reeves is about to find out there is no free lunch in the bond market. And I have talked a lot about the drift to higher borrowing, driven by higher spending commitments – such as financing foreign wars, domestic bliss, ageing populations and immigration.

A new analysis by the IMF, released in mid-September by Era Dabla-Norris, Enrico Di Gregorio, and Yongquan Cao, looked at parties across the political spectrum and noticed that they are all advocating more spending. Look at the Draghi report – where he advocates spending big to address the climate crisis. Look at the UK government. Look at the US. No one is talking about being prudent anymore. It can’t end well.

The IMF addresses the three horsemen of the debt apocalypse: climate change, defence and ageing population. The unspoken fourth is, of course, immigration. The IMF’s economists note these “spending biases” will lead to more deficits and more debt. They conclude:

“Large fiscal deficits and elevated debt levels around the world call for greater fiscal prudence, but this might be hard when political forces pull in the opposite direction."

You don’t say. Look at the US - $1 trillion in new debt every 100 days to buy growth, while every dollar of debt is buying incrementally less of it. Save for one or two ‘radicals’, no one wants to face the music just yet. There may be trouble ahead but for now, let the party continue.

Stocks retreat from highs as US inflation comes in stickier than expected

Stocks retreated from record highs as US inflation proved a little bit stickier in places than people would like - the S&P 500 closed down 0.2%, while the Dow shed 0.14%. European bourses also retreated a bit early on Friday and are now pretty well flat for the week – no significant moves. The euro fell to its weakest since early August, whilst the Japanese yen touched the mid-August lows. Sterling continues to sit above $1.30 with the bearish momentum losing stream.

US consumer inflation rose 0.2% on a monthly basis, taking the annual rate to 2.4% from the previous year, which was a little ahead of the 0.1% monthly gain and 2.3% year-over-year rate expected. That YoY number is the lowest since Feb 2021 and yet everyone is talking about a ‘hot CPI’. Go figure. The fact is though that we are at a level where the CPI numbers are not that important on the margins; far less important than the jobs numbers. The fears of a second wave of inflation proved unfounded, so now the fear is one of recession. And now we’re into the non-linear bit – choppiness (or janky, in the words of Atlanta Fed president Bostic) that we can expect from here on out. The 3-month annualized core rate rose to 3.1% from 2.1%. Jobless claims rose to a larger-than-expected 258,000 – the latter is probably more worrying for the market than the former.

The UK economy grew by 0.2% in August. Well, if you add 1% of the population in a year, you’d expect nothing less, right? Can we please stop looking at GDP and only look at GDP per capita?

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