Obscure corner of financial market sees annual headline CPI running hot, at 8.5% or higher, each of the next 5 months

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In a little-known part of the financial market that offers by far the most accurate read on US inflation, traders are pricing in an annual headline rate of 8.5% or higher on the consumer-price index for the next five months beginning in May. . ,

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As of Tuesday, market-related fixing for Treasury inflation-protected securities, or TIPS, or derivatives-like instruments, means May’s year-over-year consumer-price index reading will fall to 8.5% on Friday. This is above the 8.2% average forecast of economists polled by the Wall Street Journal and will match the 40-year high it hit in March. Fixing traders also see rates climbing to 8.6% in June and July, before reaching 8.8% in August and September. October readings are being seen at 8%.

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The chart below shows where the headline CPI rate is expected to move relative to the year-ago period.

Source: Bloomberg

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Investors are oscillating between competing narratives in which inflation either actually begins to subside or breaks low but turns into false hope. Many people are unprepared for the possibility that headline CPI readings simply continue to warm, even as the Federal Reserve continues to aggressively hike interest rates. US stocks swung between gains and losses on Tuesday as investors await Friday’s CPI print for May.

Fixing is traded by hedge funds, mutual funds, money managers and essentially anyone involved in inflation swaps. If his views play out, “a more aggressive Fed tightening program will cost the price off and we’ll probably see a half-point increase over the course of the rest of the year,” said Edward Moya, a senior US market analyst. In Oanda. “Obviously, the bond market will sell out and investors will struggle to hold on to riskier assets.”

Broadly, expectations were turning in favor of the view that inflation may peak in a few months, Moya said via phone.

According to Gang Hu, a TIPS trader at New York hedge fund Winshore Capital Partners, higher energy and food costs are behind the projected continued growth of the CPI rate seen by fixing traders, with Russia’s war on Ukraine playing a major factor.

“The fixing market is saying we’re going to have pretty strong prints for the next five to six months, and then the market has no confidence that we’re going to see a peak on inflation: it doesn’t know when inflation is going to go. Have to slow down,” Hu said via phone.

As of Tuesday afternoon, all three major stock indexes were higher, with the Dow Industrials DJIA,
+0.56%,
s&p 500 spx,
+0.67%
and Nasdaq Composite Comp,
+0.72%
Up 0.3% each. Meanwhile, with the 10-year rate TMUBMUSD10Y, most Treasury yields were lower,
2.965%
Pulling back below 3%.

Credit: www.marketwatch.com /

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