Bond market sees inflation spike subsiding, if not right away

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Nov 11 (Businesshala) – Bond markets expect inflation to rise from US retail price data on Wednesday even as price pressures worsen in the very near term, although investor opinion should empty amid divisions that the Federal Reserve How soon will action be taken to stop rising prices.

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Wednesday’s data showed the US consumer price index rose more than expected in October as the cost of gasoline and food rose, leading to the biggest annual gains since 1990, further indicating that inflation may worsen global inflation by next year. The supply gap can remain uncomfortably high. Chain.

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Even though price pressures are bullish in the short term, however, the longer-term measures suggest they are unlikely to last.

Subhadra Rajappa, head of US rate strategy at Societe Generale in New York, said: “The signals we are getting from the breakeven market are that all is well, at least on the longer-term inflationary trend.”

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The Treasury breakeven inflation curve, an investor breakeven inflation level at a given Treasury note yield, shows that investors expect inflation to run at 4.80% in the coming year, a decline of 3.65% over two years. Before, 3.16% in five years and 2.68% in 10 years.

The Fed’s preferred indicator, the five-year forward inflation rate, which measures what annual inflation is expected to be over five years, stood at 2.30%. This is down from the 2.41% level reached on October 15, the highest since 2014.

“It hasn’t really broken even below 2.50%, so for me the Fed should feel comfortable that the market is not pricing in, or at least not expecting inflation,” Rajappa said.

The Fed is targeting an average annual inflation of 2%, but has said it will allow inflation to warm higher than normal to make up for past underperformance.

Fed officials, including Chair Jerome Powell, have said inflation growth is “transient”, and Powell said last week that he expects it to ease next year.

However, some investors are not so sure.

Two-year yields have risen and the yield curve has flattened as investors adjust to the prospect of tighter monetary policy while fed funds futures are showing investors expect the US central bank to raise rates by July 2022.

“I think the most meaningful trend is a flattening of the curve, as the market is taking a more aggressive normalization path from the Fed,” said Ben Jeffrey, interest rate strategist at BMO Capital Markets in New York.

Brian Reynolds, chief market strategist at Reynolds Strategy, said some of the differences between investor approaches can be explained by how they define “transient”, given that some equity investors have interpreted the term for months. , whereas fixed-income investors see it in terms of years. ,

Reynolds said, “There’s a camp of equities investors that are convinced it’s going to be sustainable, and they’re playing in the interest rate space, forcing short-term rates in anticipation of the Fed’s subsequent suit due to inflation.” Used to be.”

However, “this year in a row, the fixed income market has set the price after two years of rising inflation and then inflation coming back. In the past few months, they have driven inflation slightly higher over the next two years, and in the coming years.” There’s a big slowdown in inflation in the U.S.,” Reynolds said.

That means the takeaway for now is that “the debate on inflation has become a little more volatile,” Reynolds said.

Meanwhile, analysts at TD Securities said this week that they expect inflation to slow “significantly” in 2022 as fiscal stimulus eases and supply constraints ease, even if price pressures continue to climb in the very near term. can keep.

The bank expects the annual CPI to increase to 2.1% by December 2022, and the core CPI to decrease to 2.3% over the same time frame. This is compared to 6.2% and 4.6% in the previous month.

Reporting by Karen Brettel; Editing by Alden Bentley and Steve Orlofsky

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