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

Savvy financial market inflation traders expect a run of headline US consumer price readings of roughly 8.8% annually over the next three months, beginning with the release of July data on August 10.

While such readings would be down from June’s 9.1% reading and support the theory that inflation may have hit a nearly 41-year high, inflation derivatives traders’ expectations still add to what could be a lot of bad news for the market in general. . The reason boils down to while high US inflation persists, which would dash hopes of investors, traders and policymakers for a relatively quick and significant slowdown in price gains.

Read: ‘Peak inflation’ trading is buoying financial markets as investors brace for US economic slowdown.

The 8.8% string of figures breaks down to 8.78% for July, 8.75% for August and 8.79% for September. It already takes into account the recent drop in gas prices, along with a drop in commodities, such as W00 wheat,
-3.28%
– and it would come as the Federal Reserve is in the midst of an aggressive rate-hike campaign. Hopes that inflation may have peaked in June may be obscuring the risk that a wage-price spiral may still play out and that price gains in other areas, such as housing, may accelerate or remain stagnant, they say. Some.

“It’s bad news that inflation lasts so long,” said Derek Tang, an economist at Monetary Policy Analytics in Washington. “The longer high inflation lasts, the more worried Fed officials will be that inflation expectations are becoming unanchored, and they can’t allow that.”

While much still depends on labor market data and whether a wage and price spiral plays out, “people are going to price in a higher fed funds rate by the end of the year and the rate increases will last longer through 2023, without the first rate cut taking place. see you later,” Tang said by phone on Tuesday. Three annual headline CPI records 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, ‘Does it come down soon enough?’ The Federal Reserve has a window to show that it will reduce inflation and people will start to lose faith in that story.”

At the moment, financial markets seem to be broadly accepting the idea that the central bank will more or less control inflation in the long run: 5-, 10-, and 30-year breakeven rates remain contained in a range of 2.2 % to 2.7%, while yields on Treasury inflation-protected securities are below their multi-year highs but rise on Tuesday, according to Tradeweb data. In addition, the three major US stock market indices DJIA,
-0.66%

SPX,
-0.08%

comp,
+0.33%
they are off the lows they reached in June, when inflation fears held sway.

After a jump in growth and technology-related stocks in July, there are now questions about how recessionary risks will weigh into 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 “pink glasses”, adding: “We still have a pretty tough sled ahead of us.”

On Tuesday, major stock indices were lower in afternoon trading as investors also factored in geopolitical risks between the US and China. Meanwhile, Treasury yields were broadly higher as investors sold government debt, reversing course earlier in the day.

“If we’re going to have a jobs/price hit, stocks could be hit hard,” Tang of Monetary Policy Analytics told MarketWatch. Rising labor costs leading to economic weakness “is going to hit revenue and could be a problem for profit margins.”

“The biggest problem is that the market may be misreading the Fed’s seriousness about inflation,” he said. “It may be wishful thinking that the Fed can cut it to 2%.”

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

Read: Top Fed Officials Say US Interest Rates Will Keep Rising Until High Inflation Ebbs

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