US inflation jumped 0.8% month-on-month in November on the back of surging energy costs, above market forecasts. On an annualized basis, consumer prices have increased 4.3%, the highest since June 2006. In response, Asian and European equities fell today on concerns that the Federal Reserve will have less flexibility in cutting the benchmark interest rate to 4% in January 2008 – a move analysts say the market had already priced in. Last week, Western central banks launched a co-ordinated plan to inject liquidity in global money markets but the Federal Reserve is now facing a dilemma whether to continue monetary easing after last week’s 25bps rate cut or focus on the real economy and fight inflation.
Global emerging market equity funds have been the biggest beneficiary of the turmoil in US markets with investors pouring a record $3.4 billion in the last week, according to Emerging Portfolio Fund Research. In addition, Asia (excluding Japan) funds absorbed another $1.57 billion, Latin America equity funds $489 million and EMEA (Europe, Middle East, Africa) equity funds $846 million. (For coverage on how this bull run is threatened by volatile commodity prices, please click here)
China has scrapped its 13% tax rebate on grain exports in a bid to lower food prices, which rose 18.2% in November, and fight inflation. Tax incentives to export wheat, corn, rise and soya beans will be eliminated from December 20. Beijing is concerned that output will not satisfy domestic demand, potentially fanning discontent among the rural and urban poor. China is a net exporter of corn, rice and wheat so analysts fear this move will add further inflationary pressure to food prices globally. (For further coverage, please click here)
Chile’s central bank unexpectedly hiked interest rates by 25bps to 6%, on the back of high food and fuel prices. Annual inflation soared to 7.4% last month, the highest since July 1996. Experts say monetary tightening may continue next year after the central bank governor Jose de Gregorio described inflation as very high and likely to remain so for many months.