Swift and surprising drop? Inflation traders see CPI rate falling toward 2% by June — and staying there

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A counterfactual is developing in financial markets over the most likely path for US inflation, and it is one that will come as a big surprise to many investors and policy makers.

The view is that inflation as measured by the annual headline rate on the consumer-price index will fall below 3% after the next few months and remain around 2% for the entire second half of 2023. Derivative-like instruments known as fixings, which are seen as the brightest minds of the financial market on inflation, are considering such a scenario for this year. They have been close to the mark of their forecasts during the run-up to inflation from 2021 to 2022, although they have also missed the negative surprise.

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Source: Bloomberg

Tom de Galloma, managing director and co-head of global rates trading at BTIG, said: “We are in the same camp as the fixing traders and see a direct correlation between the enormous amount of weakness in the economy and the shrinking money supply and inflation. Are.” LLC in New York.

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“People don’t want to continue paying higher prices and there is a real danger that inflation eases toward 3% this year,” De Galoma said Wednesday by phone.

“I’m looking for another 25-basis-point Fed rate hike in March, from there rate hikes and low inflation are the big story. The inverted yield curve is telling me that something serious is going to happen in the economy, and inflation has recently declined across countries. like india “I’m very confident that inflation is going to drop here,” he said.

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The notion that inflation could approach the Federal Reserve’s target of 2% within months is one that hasn’t been discussed much publicly—not even by central bankers themselves.

The consensus view on inflation is that it is likely to remain elevated at anywhere between 3% and 6% for some time, which would prompt the Fed to raise interest rates and leave them there – for riskier assets bad condition. In fact, some traders and strategists are focusing on the competing argument that the US could be heading into a period of “fleeting deflation,” in which any recovery in price gains would be fleeting.

Top Wall St economist says ‘no landing’ scenario could sink stock-market rally

The year-over-year CPI rate fell to 6.5% in December from a peak of 9.1% last June, amid hopes that further declines are coming and that financial markets may recover from a dismal 2022 performance in stocks and bonds. The January CPI is due to be released next Tuesday. When Fed’s 2% inflation target Linked to another inflation gauge — the personal consumption expenditure price index — policymakers pay attention to the annual headline CPI rate because it affects household expectations.

Behind the counterargument in favor of a sharp, surprise return to more normal, pre-pandemic levels of inflation is the idea that the US economy would not be able to survive a recession and that such a contraction would lead to a sharp decline in price gains. ,

On Wednesday, financial markets were digesting comments made by Fed policymakers — all pointing to the need to continue fighting inflation.

New York Fed President John Williams said the central bank will need to keep interest rates high “for a couple of years” to kill inflation, while Fed Chairman Jerome Powell said on Tuesday that January’s blockbuster job hike would Underlines the need to raise rates. , Powell said he expects inflation to drop to around 2% by 2024.

No wonder Powell didn’t commit to an additional raise. Here are five reasons why the January jobs report may be too good to be true.

On Wednesday, all three major indices DJIA,

The Nasdaq Composite ended lower, down 1.7%. Meanwhile, 2- to 10-year Treasury yields declined and the 6-month rate at TMUBMUSD06M,
T-bills edged closer to 5% — in line with expectations for the fed-funds rate.

At Pennington Partners & Co., a Bethesda, Maryland-based multifamily office that oversees $2 billion, Sumit Handa, co-head of the firm’s investment committee, said a swath of the U.S. economy — from housing to commodities and auto sales Till — is pointing to a recession and that January’s job gains were a “trait”.

“Our view is that the Fed is nearing the end of its rate hike, and we think the consensus is wrong about the timing of the inflation decline,” Handa said via phone. “We see a decline in inflation – rate increases leading to a challenging environment for anyone who borrows – resulting in deflation in the second half of the year. We believe that in six to nine months Recession is likely to come.

“I can’t tell you what will happen next month or next week, but I can suggest that the economy is weak,” he said. “Further, with inflation coming down, it bodes well for consumer confidence and [is] Partly why riskier assets rallied during January.

Credit: www.marketwatch.com /

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