Financial markets may see a three-month streak of 8.8% inflation readings starting next week, adding up to “bad news”


The financial market’s most knowledgeable inflation traders expect a range of about 8.8% annual headline readings in US consumer prices over the next three months, starting with the August 10 release of July data.

Although such readings will be below that of June 9.1% reading And supporting the theory that inflation may have hit a nearly 41-year high, inflation derivatives traders’ expectations still add up to what could be a lot of bad news for the broader market. The reason boils down to the period of time when the high inflation in the US continues, which will raise the hopes of investors, traders and policymakers for a relatively faster and more significant slowdown in price increases.

to read: ‘Peak Inflation’ Trade Moves Financial Markets As Investors Prepare For US Economic Slowdown

The data sequence of 8.8% – broken down into 8.78% for July, 8.75% for August and 8.79% for September – already takes into account the recent drop in gas prices, along with a drop in commodities such as wheat
W00,
-3.28%
,
And it will come at a time when the Federal Reserve is in the midst of an aggressive interest rate hike. Hopes that inflation may have peaked in June may obscure the risk that a wage-price spiral may still develop and that price increases in other areas, such as shelter, may accelerate or remain sticky, some say.

“It’s bad news that inflation is going to be this high for this long,” said Derek Tang, an economist at Monetary Policy Analytics in Washington. “The longer high inflation persists, the more Fed officials worry that inflation expectations are becoming unanchored, and they cannot allow that to happen.”

Although much still depends on labor market data and whether a wage-price spiral will develop, “people are going to price in a higher fed funds rate for the end of the year and rate hikes will continue longer into 2023, with the first rate cut not happening until later,” Tang said by phone on Tuesday . Three printings annual average cost of 9% actually “makes it hard to see how the Fed is going to start cutting interest rates in 2023. Inflation starting to come down is good, but the question is, ‘Is it coming down fast enough?’ The Fed has a window to prove that it is going to lower inflation, and people will start to lose faith in that story.”

For now, financial markets seem to be broadly accepting the idea that the central bank will more or less control inflation over the long term: the five-, 10- and 30-year breakeven rates remain in the 2.2% to 2.7% range, while yields on hedged securities Treasury inflation is off its multi-year highs but rose on Tuesday, according to Tradeweb data. In addition, all three major US stock indices
DJIA,
-1.23%

SPX,
-0.67%

comp,
-0.16%

are off the lows they reached in June, when inflation fears dominated.

After a surge in growth and tech-related stocks in July, there is now a question of how recession risks will weigh on their recent bear market rally. Ed Parks of Franklin Templeton Investment Solutions said in a phone interview late last week that the market may be watching “Rose colored glasses.” “We still have some pretty tough sledding ahead of us,” he added.

On Tuesday, the major stock indexes finished lower as investors also factored in geopolitical risks between the U.S. and China. Meanwhile, the two-year and 10-year Treasury yields posted their biggest gains since June as investors aggressively sold government debt, turning The track is promoted today.

“If we’re going to have a job/price shock, stocks could be very affected,” Tang of Monetary Policy Analytics told MarketWatch. The increase in labor costs that go into economic weakness “will hurt revenues and may pose a problem for profit margins.”

“The bigger problem is that the market may not understand how serious the Fed is about inflation,” he said. “It may be wishful thinking to think the Fed can drop it back to 2%.”

On Tuesday, Fed officials said the central bank needs to raise interest rates much higher and likely keep them high for a while to contain the worst burst of inflation in nearly 41 years.

to read: Senior Fed officials say interest rates in the US will continue to rise until high inflation subsides



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