Financial market-savvy inflation traders expect a run of about 8.8% annualized in US consumer price readings over the next three months, from the August 10 release of the data of July
While these readings would be below June’s reading of 9.1% and support the theory that inflation may have hit a near 41-year high, inflation derivatives traders’ expectations still add the which could be a lot of bad news for the market in general. . The reason comes down to the length of time high US inflation persists, which would upset investors, traders and policymakers’ hopes for a relatively faster and more significant slowdown in price gains.
Reads: ‘Inflation peak’ trade is driving financial markets as investors brace for US economic slowdown
The string of 8.8% figures — broken down into 8.78% for July, 8.75% for August and 8.79% for September — already takes into account the recent decline in prices of gas — along with a drop in raw materials, such as wheat W00, -3.28. %, and would come as the Federal Reserve is in the midst of an aggressive rate hike campaign. Hopes that inflation peaked in June may be obscuring the risk that a wage-price spiral may yet develop and that price gains in other areas, such as housing, may accelerate or remain it’s catchy, some say.
“It’s bad news that inflation has been so high for so long,” said Derek Tang, an economist at Monetary Policy Analytics in Washington. “The longer high inflation persists, the more concerned Fed officials are that inflation expectations are not anchored and they can’t afford it.”
While much still depends on labor market data and whether a wage-price spiral develops, “people will be getting a higher fed funds rate by the end of the year and rate hikes will last longer into 2023 , without the first rate cut happening until later,” Tang said by phone on Tuesday. Three annual CPI headlines of essentially 9% “make it hard to see how the Fed will start cutting rates in 2023. Inflation starting to come down is good, but the question is, ‘Is it coming down soon enough?'” The Fed has a window to show that it will bring inflation down and people will start to lose faith in that story.”
For now, financial markets appear to broadly accept the idea that the central bank will be more or less in charge of controlling inflation over the long term: the five-year, 10-year and 30-year benchmark rates remain in a range of 2.2 . % to 2.7%, while yields on inflation-protected Treasuries are below their multi-year highs but were rising on Tuesday, according to Tradeweb data. Also, all three major U.S. stock indexes DJIA, -0.68% SPX, -0.09% COMP, +0.33% are off the lows they hit in June, when inflationary fears dominated.
After a jump in growth and tech-related stocks in July, there is now a question of how bearish risks will weigh on their recent bear market rally. Ed Perks of Franklin Templeton Investment Solutions said in a phone interview late last week that the market may be looking through “rose-colored glasses.” “We still have a pretty tough sled ahead of us,” he added.
Major stock indexes were lower in the afternoon on Tuesday as investors also factored in geopolitical risks between the US and China. Meanwhile, Treasury yields were generally higher as investors sold government debt, reversing the previous course.
“If we’re going to have a job/price shock, stocks could be hit hard,” Tang of Monetary Policy Analytics told MarketWatch. Rising labor costs amid economic weakness “will weigh on revenues and could be a problem for profit margins.”
“The bigger problem is that the market may be misunderstanding how serious the Fed is about inflation,” he said. “It may be wishful thinking that the Fed can get it back down to 2%.”
On Tuesday, two senior Fed officials said the central bank needs to raise interest rates much more and likely keep them high for some time to contain the worst outbreak of inflation in nearly 41 years.
Reads: Top Fed officials say US interest rates will keep rising until high inflation eases