Stock markets the world over haven't reacted well to the sudden re-emergence of inflation in 2022.
That's because fast-rising consumer and producer prices have seen central banks resort to aggressive interest rate hikes.
The Reserve Bank of Australia has hiked rates from an all-time low of 0.10% to the current 2.60%. While the US Federal Reserve has been even more hawkish, raising rates to the current 3.25%.
How have stock markets reacted to the inflation-busting rate rises?
As we said, not well.
The S&P/ASX 200 Index (ASX: XJO) is down 11.1% year-to-date, following a strong run in 2021.
And in the US, the S&P 500 Index (INDEXSP: .INX) has tumbled 23.5%.
But something strange just happened.
What's happening with the ASX 200 and US markets?
As we reported here, the S&P 500 closed up 2.6% yesterday, surging 5.1% higher after opening sharply lower.
And the ASX 200 is following suit today, up 1.7% during the lunch hour.
Why is that strange?
Because the September inflation figures released out of the US yesterday still revealed prices in the world's largest economy were rising at the fastest rate in 40 years. That, in turn, would indicate investors can expect more aggressive rate rises from the US Fed, which has classically been a headwind for stock markets.
Some analysts suggest yesterday's rally in US stock markets and the big boost on the ASX 200 could be due to over-leveraged, bearish options traders getting caught on the wrong side of the trend and forced to cover their shorts.
But economist Peter Esho, co-founder of Wealthi, has a different take.
Are stock markets starting to indicate inflation is under control?
Commenting on the stock market rally in the face of inflation, Esho said (courtesy of The Australian Financial Review):
We think that there is a growing consensus in markets that inflation is now under control and as recent interest rates start to flow through into the economy over the next year, inflation will be brought back under control.
Inflation was in line with expectations, but that's not to say there weren't positive glimpses in there. Composition is very important and we know from past history that it takes time for prices to stop rising.
Esho said higher interest rates don't have an immediate impact on inflation.
"Monetary policy and rising rates have a 12-18 month lag, so we will only start to see rate rises take effect in the next few months before their full force being felt next year," he said.
In potentially good news for stock markets, he added, "Bottom line: We think the RBA read things perfectly when they raised by only 25 basis points in October, balancing inflationary pressure with the need to maintain financial stability."
