Financial markets could see a three-month streak of 8.8% inflation readings starting next week, adding to ‘bad news’

The most savvy inflation traders in the financial market are expecting a run of around 8.8% annual US consumer price readings over the next three months, starting with the release of the July data on August 10.

While such readings are lower than June’s 9.1% reading and support the theory that inflation may have peaked at a nearly 41-year high, inflation derivatives traders’ expectations add up. always to what could be a lot of bad news for the whole market. . The reason comes down to how long high inflation in the United States persists, which would upset the hopes of investors, traders and policymakers for a relatively faster and significant slowdown in price gains.

Lily: ‘Peak inflation’ trade boosts financial markets as investors brace for US economic slowdown

The series of figures 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 petrol prices, as well as d ‘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 could mask the risk that a wage-price spiral could develop further and that price gains in other areas, such as housing, could accelerate or remain sticky , according to some.

“It’s bad news to have inflation so high for so long,” said Derek Tang, an economist at Monetary Policy Analytics in Washington. “The longer high inflation lasts, the more Fed officials worry that inflation expectations are no longer anchored, and they can’t allow that.”

While much still hinges on labor market data and whether a price-wage spiral unfolds, “people are going to be anticipating a higher fed funds rate for the end of the year and rate hikes that last longer. until 2023, with the first rate cut not later,” Tang said by phone Tuesday. Three annual headline CPI prints of around 9% “make it hard to see how the Fed will start to cut 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 prove it’s going to bring inflation down, and people will start to lose faith in this story.

For the moment, the financial markets seem to largely accept the idea that the central bank will more or less control inflation in the long term: the equilibrium rates at five, ten and thirty years remain contained within a range of 2.2 percent to 2.7%, while yields on Treasury inflation-protected securities are off their multi-year highs but rose on Tuesday, according to Tradeweb data. In addition, the three major US stock indices DJIA,
-1.23%

SPX,
-0.67%

COMP,
-0.16%
are far from the lows reached in June, when inflationary fears dominated.

After a jump in growth and technology-related stocks in July, the question now arises as to how recession risks will weigh on their recent bearish rally. Ed Perks of Franklin Templeton Investment Solutions said in a phone interview late last week that the market may be looking through “rosy glasses”. “We still have some pretty tough luge ahead of us,” he added.

On Tuesday, major stock indexes ended lower as investors also factored in geopolitical risks between the United States and China. Meanwhile, yields on two- and 10-year Treasury bills posted their biggest gains since June as investors aggressively sold government debt, reversing price at the start of the day.

“If we’re going to have a labor/price shock, equities could be hit very hard,” Tang of Monetary Policy Analytics told MarketWatch. Soaring labor costs heading into economic weakness “will hurt revenues and could be a problem for profit margins.”

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

On Tuesday, senior Fed officials said the central bank needed to raise interest rates dramatically and likely keep them high for some time to contain the worst inflation spike in nearly 41 years.

Lily: Top Fed officials say U.S. interest rates will keep rising until high inflation eases