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With the sharp rise in interest rates, markets have been looking for rising inflation.
So Wednesday’s December CPI report will be important even if it continues to show a small increase in the consumer price index. According to Dow Jones, economists expect growth of 0.4% month-on-month and 1.3% year-on-year. The core CPI, less food and energy, is expected to increase by 0.1% or 1.6% year-on-year, from 0.2% and 1.6% in November.
The faster pace of bond yields since the beginning of the year has been accompanied by rising inflation expectations. The 10-year rate of return, a bond market instrument for inflation expectations, was 2.07% on Tuesday, suggesting investors expect inflation to reach the average level in the next 10 years. It rose to 2.11% last week.
“I think inflation is a real change if it should happen. That’s why the reasons are certainly rising,” Jeff Gundlach, CEO of Doubleline Capital, said this week. He said the CPI is expected to reach 3% by May or June.
Covid-19 had a unique impact on inflation. Prices fell sharply at the close of the economy last year and there was an uneven impact on the economy and prices. Rents, for example, have fallen sharply, but house prices are rising. Strategists said that while prices in the services sector are low, prices for goods are rising.
“Once in March, April, May, you will start getting easy comparisons. You will see 3% inflation,” said Peter Boockvar, investment director at Bleakley Advisory Group. “I think the pressure is increasing and that will be the key story for 2021.”
Rising interest rates have already given a chill through some Big Tech and growth stocks, so the stock market could be sensitive to any rise in inflation. One factor behind rising yields is the expectation that inflation will rise as the economy reopens and as government stimulus funds work through the economy.
Since the beginning of January, the 10-year Treasury yield has risen by almost 25 basis points to 1.18% on Tuesday, before falling to 1.14%. “I don’t think we’re ready for a lot of inflation tomorrow,” said Chris Rupkey, chief financial economist at MUFG. “Inflation is expected to rise slightly, but practically petrol prices at the pump have risen … Any inflation is likely to be closely linked to energy and the Fed chairman [Jerome] Powell said they would not answer.
Rupkey said there could also be some inflation in goods, resulting from consumers receiving home deliveries instead of buying in stores.
Frustrated by the lack of inflation for years, the Fed has changed its inflation policy so that it now targets an average range instead of its 2% target. This means that inflation could rise above this 2% level, but the Fed would not change policy unless it persists at a higher rate.
“Somehow inflation has been put on the back of the Fed’s concerns. They have somehow moved to full employment as a key indicator,” Rupkey said. Tariff strategists said the market is already full of speculation that, although in the future, rising inflation could raise rates and ultimately lead the Fed to move its own target rate with zero funds.
“I think the market is struggling in a way with the negative potential of higher rates on the one hand and what it can do to compress the multiples, but on the other hand, saying that rates are rising because we have the vaccine launch and through therefore, stay positive about risky assets, “Boockvar said.” It’s like a tugboat.
“I think inflation is the worst nightmare of inflated asset prices … for high stocks, inflation is not their friend,” he said.
Fed Chairman St. Louis, James Bullard, acknowledged on Tuesday that prices should rise by the end of this year. “Inflation appears to be moving more amid rising expectations of price pressure,” he said in an interview, noting that he expects higher inflation in 2021 and 2022.
“I will reiterate my belief that the Fed will eventually get the inflation they crave and then some, despite their policies, and they will eventually regret what they wanted, just like the stock market. bonds and any price has fallen, “Boockvar said.
The CPI report will be released at 8:30 AM ET.