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With the strongest movement in interest rates, markets have been on the lookout for inflation.
So the December CPI report on Wednesday will be important even if it still shows a dull rise in the consumer price index. According to the Dow Jones, economists expect a 0.4% month-on-month and 1.3% year-on-year increase. The basic CPI, less food and energy, is expected to increase by 0.1% or 1.6% year-on-year, compared to 0.2% and 1.6% in November.
The rapid evolution of bond yields since the beginning of the year has been accompanied by an increase in inflation expectations. The 10-year imbalance, an instrument in the bond market for inflation expectations, stood at 2.07% on Tuesday, suggesting that investors expect inflation to average this level over the next few years. 10 years. Last week it reached 2.11%.
“I think inflation is a real game changer in case it happens. That’s definitely why rates are rising,” Jeff Gundlach, CEO of Doubleline Capital, told CNBC this week. He said he expects the CPI to reach 3% in May or June.
Covid-19 has had a unique impact on inflation. Prices fell sharply when the economy closed last year and there has been an uneven impact on the economy and prices. Rents, for example, have fallen sharply, but house prices are rising. Strategists said that while services sector prices are depressed, commodity prices are rising.
“Once you get to March, April and May, you’ll start making easy comparisons. You’ll see 3% inflation,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group. “I think the pressures are increasing, and that will be the key story for 2021.”
Rising interest rates have already caused a chill through some Big Tech and growth stocks, so the stock market could be sensitive to any recovery in inflation. One factor behind rising yields is the expectation that inflation will recover as the economy reopens and as government stimulus funds run through the economy.
Since the beginning of January, the ten-year Treasury yield rose almost 25 basis points to 1.18% on Tuesday, before falling back to 1.14%. “I guess we’re not prepared for a lot of inflation tomorrow,” said Chris Rupkey, chief financial economist at MUFG. “Inflation is supposed to rise a bit, but basically petrol prices at the pump rose … Whatever inflation is likely to be strictly energy-related, and the Fed chairman [Jerome] Powell said they will not respond.
Rupkey said there could also be some commodity inflation, as a result of consumers receiving home deliveries instead of buying in stores.
Frustrated by the lack of inflation for years, the Fed changed its inflation policy so that it now targets a mid-range instead of its 2% target. This means that inflation could rise above this 2% level, but the Fed would not change policy if it did not persist at a higher rate.
“Somehow, inflation has been put in the background of the Fed’s concerns. They’ve all shifted to full employment as a key indicator,” Rupkey said. Rate strategists said the market is already full of speculation that although in the future, rising inflation could raise rates and ultimately push the Fed to move its own target rate zero fed background.
“I think the market is struggling with the negative potential of higher rates on the one hand, and what this can do to compress multiples, but on the other hand, to say that rates are rising because we have the vaccine implantation , and therefore stay positive on risky assets, ”Boockvar said. “It’s like a tug of war.”
“I think inflation is the worst nightmare of inflated asset prices … for multiple high stocks, inflation is not your friend,” he said.
The Fed Chairman of St. Louis, James Bullard, acknowledged Tuesday that prices are expected to rise later this year. “Inflation appears to be rising amid expectations of rising price pressures,” he said in an interview, noting that he expects more inflation in 2021 and 2022.
“I will repeat again my belief that the Fed will finally get the inflation they longed for and then some, despite their policies, and will eventually regret what they have wanted, as well as the bond market and whatever it cost,” he said. dir Boockvar.
The CPI report will be released at 8:30 am ET.