Markets more focused on fresh U.S. inflation data than midterms

Financial markets are paying less attention to the U.S. midterms than to Thursday’s inflation data, affirms the CEO of one of the world’s largest independent financial advisory, asset management and fintech organisations.

The observation from Nigel Green of deVere Group comes as results continue to trickle in from the U.S. midterm elections in which it appears that Republicans are likely to win the House of Representatives.

The outcome of the elections is expected to be announced ahead of official U.S. inflation data being published Thursday.

Nigel Green comments: “Republicans have made gains, albeit less than previously anticipated.

“Should the Republicans take the House, even if by a small majority, it would represent a significant power shift and the likelihood of significant political gridlock.

“Whilst often deeply frustrating for voters, this gridlock will buoy the markets because it means that the status quo is more likely to be preserved – and markets thrive on certainty.

“As neither party will be willing to compromise too much, and neither party will be able to advance their agendas, sweeping legislative changes would be shelved or watered down.

“As such, businesses would be able to pursue their current plans without the threat of major upheaval.”

He continues: “Whoever wins or loses, we expect markets to rally, as they have almost always done in the past following the midterms.

“However, what most investors will be focusing on this week isn’t the midterms. It is the U.S. inflation data that is out Thursday.

“We expect that inflation will have cooled in October — but not enough for the Federal Reserve to step down from its agenda of interest rate hikes.

“The data means it’s likely that the Fed will keep its foot off the brake of the U.S. economy, meaning a fifth consecutive 75 basis-point increase in interest rates is possible next month.”

At last week’s crucial Fed meeting, investors were eagerly analyzing the tone of Chair Jerome Powell for guidance on the central bank’s future approach in the battle against inflation.

Powell said the Fed could slow its pace of rate hikes but that no decision has been made yet. But he also noted that the Fed is nowhere near done raising rates and that it will continue hiking rates for some time yet.

The ‘pivot’ Wall Street had hoped for didn’t materialize.

“Powell’s tone and words last week didn’t go down well with the markets, so Thursday’s inflation data, which we expect not to be great, will be of concern right now,” says Nigel Green.

The deVere CEO concludes: “Markets are more focused on Thursday’s inflation data, and how this will trigger the Fed, than on the midterms.

“The midterms will likely prompt a market rally, but it will be tempered by data out later this week.”