CPI: Not the most welcome outcome

Stephen Innes SPI Asset Management

The recent inflation reports have been stronger than expected, which could balance out the more cautious tone from Fed officials this week. However, policymakers seem more concerned with how long they will maintain the current interest rate profile rather than how high rates should be. Therefore, the slightly higher-than-anticipated inflation rate is unlikely to cause significant market volatility. ( famous last words).

It's not just a matter of wishful thinking; the "Fed rhetoric shift" is becoming more apparent by the day. Christopher Waller's recent comments indicate that the recent increase in yields, especially the re-pricing of the term premium and the significant rise in real rates, might be an alternative to an actual rate hike. This suggests the Federal Reserve is gradually shifting towards a more dovish stance on monetary policy.

The future direction of events really depends on how economic indicators play out. Unless inflation unlikely trends higher or resurgent signs of a demand-supply imbalance in the labour market lead to a wage-price spiral, we think the Fed will continue to tap a less hawkish beat. This should increase the demand for longer-duration assets and create a favourable environment for a "Santa rally".

How the market fully digests today's CPI print remains to be seen, but it's not the most welcome outcome investors had hoped for.

Author

Stephen Innes

SPI Asset Management

With more than 25 years of experience, Stephen has a deep-seated knowledge of G10 and Asian currency markets as well as precious metal and oil markets.

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