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With the sharp upward movement in flat rates, markets have been on the lookout for rising inflation.
So Wednesday’s CPI report in December will be important even though it still shows a quiet rise in the consumer price index. According to Dow Jones, economists expect an increase of 0.4% month-on-month, and 1.3% year-over-year. Core CPI, less food and energy, is expected to be up 0.1% or 1.6% year-over-year, against 0.2% and 1.6% in November.
The rapid movement is higher in bond yields since the beginning of the year coupled with an increase in inflation expectations. The 10-year equilibrium, a bond market instrument for inflation expectations, at 2.07% on Tuesday, suggested that investors expect average inflation to be at that level for the next 10 years. It was as high as 2.11% last week.
“I think inflation is a real player of the game if it happens. That’s definitely why rates are rising,” Jeff Gundlach, Doubleline’s CEO of Capital told CNBC this week. He said he expects CPI to reach 3% by May or June.
Covid-19 has had a significant impact on inflation. Prices fell sharply when the economy closed last year, and the economy and prices have been hit unevenly. Rents, for example, have fallen sharply, but home prices are rising. Strategists said that while prices in the service sector are depressed, commodity prices are rising.
“When you arrive in March, April, May, you will start to get an easy comparison. You will see 3% inflation,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group. “I think the pressures are lifting, and that’s going to be a key story for 2021.”
Flat rates are already rising have put a chill through some Big Tech stocks and growth, so the stock market could be sensitive to any rise in inflation. One reason behind rising yields is the expectation that inflation will pick up as the economy reopens and as government stimulus funds fund work through the economy.
Since the beginning of January, 10-year Treasury yields have climbed nearly 25 basis points, to as high as 1.18% on Tuesday, before falling back to 1.14%. “I believe we will not be ready for a large number of inflation tomorrow,” said Chris Rupkey, chief financial economist at MUFG. “Inflation is expected to be up slightly, but gasoline prices at the pump have basically gone up. … Whatever inflation is likely to be closely linked to energy, and Chairman Fed [Jerome] Powell said they were not going to respond. “
Rupkey said there could also be some product inflation, as a result of consumers getting home delivery instead of buying in stores.
Overwhelmed by the lack of inflation for years, the Fed changed its inflation policy so that it now targets an average range instead of its 2% target. That means inflation could rise above that 2% level, but the Fed would not change policy if it did not continue at a higher level.
“Somehow inflation has been put on the back burner of Fed concerns. They have all moved to full earnings as a key indicator,” Rupkey said. Rates strategists say the market is already full of speculation that, although it is a long way off, a pop in inflation could push rates higher and ultimately give Fed a boost. moving its target asset rate to zero.
“I think the market is a kind of struggle with the negative that can be at higher levels on the one hand, and what can that do to close multiples, but on on the other hand, telling themselves that rates are rising as we roll out the vaccine, so stay ahead of risk assets, “Boockvar said.” It’s like a war thatch. “
“I think inflation is the worst nightmare of inflated asset prices … for high multiple stocks, not their friend’s inflation,” he said.
St. Louis Fed President James Bullard acknowledged Tuesday that prices should rise later this year. “Inflation is likely to move higher amid expectations of rising prices,” he said in an interview, noting that he expects more inflation in 2021 and 2022.
“I will reiterate my view that the Fed will finally get the inflation they have been asking for and then some, despite their policies, and they will eventually regret what they have been wishing the market would get bonds and anything the price off, ”Boockvar said.
The CPI report will be published at 8:30 am ET.