Global | Monetary Policy & Inflation
Charts of the Week: Sentiment Suffers as Prices Spiral
- By Matthew Tibble
- 2 min read
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Summary
- Risk sentiment sours in the US.
- American house prices cool, but OER inflation surges.
- EU energy prices spiral.
US Risk Sentiment Deteriorates
Following Jackson Hole and Chair Powell’s reaffirmation of Fed hawkishness, risk sentiment has worsened. US equity outflows returned after three weeks of inflows as investors reversed the rally in the S&P 500 (Chart 1). Meanwhile, the AAII survey reveals investors have taken a more bearish view of the market over the next six months (Chart 2). In contrast, however, hedge funds appear to be lightening their bearish US equity positions – our Market Positioning report has more details.
OER Inflation Surges
US house prices rose by less than expected in June, per yesterday’s data, with the FHFA index printing 0.1% MoM against 0.8% expected and 1.4% in May. However, the slowdown will take time to translate into lower owners’ equivalent rent (OER) inflation in the consumer price indices. Since 2020, OER has surged (Chart 3). Housing, which is tightly correlated to OER, accounts for 31% of the weights in the CPI and 15% of the weight in the PCE indices.
EU Energy Prices Are Out of Control
The market is looking for further MoM rises in euro-area inflation readings, suggesting a YoY rise to 9%. Recent surges in electricity and gas prices would support this, with both heavily impacting the ECB’s inflation outlook. As we set out in our pre-mortem, it would take little to keep inflation at double its target into 2024. For context, back in January, ECB Board Member Schnabel warned that if electricity prices remained at their (then) current levels, medium-term inflation could overshoot. Gas prices have since tripled (Chart 4).