ASX200 rout - What can the 1996 inflation episode teach today?
Tony Sycamore May 19, 2021 5:57 AM
Last week US core CPI hit 3%, its highest level since January 1996. The very same year that I started on the floor of the Sydney Futures Exchange as a trainee bond trader for Macquarie Bank.
The 1996 inflation scare sent the bond market into a six-month tailspin. Yields on benchmark US 10 year bonds rose from around 5.50% to 7% by mid-1996. Not immune from the bond market rout, US equities topped out in May, before falling over 11% into mid-July.
Despite concerns that inflation would continue to surge as the economy strengthened, the then Chairman of the Federal Reserve Allan Greenspan, stared down the bond market vigilantes as well as fellow board members and refused to raise official interest rates.
Greenspan’s decision was later viewed as a key catalyst for the “Tech Wreck’ in 2000. However, in between the US economy enjoyed four years of low unemployment and extraordinary growth.
Of course low unemployment is not the cause of rising inflation in 2021. As current Fed Chairman Powell likes to remind, the US economy is still about 8 million jobs short of where it was pre the pandemic.
Like Greenspan in 1996, Powell does not believe the recent rise in inflation requires a tightening of monetary policy. Instead the current rise is viewed as temporary, caused by a combination of base effects, surging global demand as well as supply shortages and bottlenecks.
Time will tell if Powells decision to follow Greenspan is correct or whether he will be forced to raise interest rates. In the interim, the tug of war between the Fed and market participants is likely to ensure recent equity market volatility will continue.
In that respect, we refer back to 1996 when equity markets topped out in May, as they appear to have done again in May 2021.
Technically the view of the ASX200 remains that a deeper pullback towards trend channel support at 6800 is likely, as written about in early May here
Should signs of basing emerge from 6820/00, the expectation would be for a retest of the recent 7122 high. Aware that should support at 6820/00 fail to halt the decline, the next level of support is not until 6650.
Source Tradingview. The figures stated areas of the 19th of May 2021. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation
StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.