Wonderful night! U.S. inflation exploded and Wall Street got high

Inflation is becoming the biggest tail risk in the market

“What is the biggest risk to the U.S. financial markets, as told by the magic mirror?”

Bank of America’s “Magic Mirror” will tell you for many months that inflation is becoming the biggest tail risk in the market; Deutsche Bank’s “Magic Mirror” latest also shows that inflation has become a “time bomb” under people’s feet.

With these market intelligence “magic mirror” reminders warning, many people with anxiety, last night ushered in the release of the U.S. May inflation data day. In the end, the inflation data really “exploded” – after entering the “4 era” in April, the U.S. CPI in May and hoofed into the “5 era”, the performance of inflation data seems to be linked to the month ……

However, for many market participants, they may have guessed the beginning of last night’s inflation story, but simply could not imagine the next development of the story – high to frightening inflation data, but brought a happy “happy” ending for all.

U.S. stockholders are happy that the S&P 500 has hit a new record high after more than a month, and that the paper that separated it from the all-time record for the past many days has finally been broken ……

U.S. bond bulls are happy that the 10-year yield hit a new 3-month low and the bond market sell-off in the first quarter of the year is officially a “thing of the past” ……

Investors in the commodities markets were happy as oil prices rose to a more than two-year high and international gold prices cleared the gloom of the previous two days and regained $1,900 ……

Even the Fed, which is in a period of silence, is happy that the market has voluntarily entered the “5 era” of inflation data as a treasure, and no longer need officials to painstakingly sell the “temporary theory of inflation” ……

By all accounts, it was a “fantastic night”!

Why are the markets not happy instead of sad in the face of inflation data entering the “5 era”?

The market is not only a good place to be, but also a good place to be.

There are many interpretations of this in the market, and the most widely adopted view is that the rise in the U.S. CPI in May is still mainly due to those temporary factors and base effects, and cannot disprove the Fed’s view that inflation is temporary, which reduces the need for the Fed to turn to tightening policy as soon as possible. Although it may be that for many people who are convinced that inflation will be long term, they are not so convinced by this answer.

Purely from the data itself, the U.S. CPI in May was notably high, not only hitting a new high after inflation of 5.3% in August 2008, but the core CPI after removing food and energy prices also rose 3.8% year-over-year, the highest since May 1992. However, after the twists and turns caused by last month’s CPI data, investors have become fully “immune” to the soaring CPI.

Wonderful night! U.S. inflation exploded and Wall Street got high

And a study of the specific breakdown of CPI components may also partially explain why the market did not feel much panic after last night’s CPI data release.

One big similarity between the May data and April is this – used car prices continue to rise strongly, up 7.3% year-over-year in May. Used car prices have risen 16.6 percent so far this year, according to the Mannheim Used Car Index, which is up 26 percent year-to-date and 48 percent year-over-year, and will continue to rise.

However, as fierce as the used car price hike is, market participants aren’t too scared. The current supply of new cars on the market is being hit by the chip shortage, which is the root cause of the increasingly hot used car market. However, if the chip crisis can be eased in the second half of the year, this aspect of the threat will also be eliminated most of the time. In fact, the Federal Reserve is also concerned about this area, but also do not take it too seriously. Federal Reserve Governor Brainard said last week, used car cost pressures “may persist over the summer, but I expect them to eventually subside and may be some kind of reversal in subsequent quarters”.

Wonderful night! U.S. inflation exploded and Wall Street got high

And in addition to used cars, other key signs revealed by the CPI in May are that rising raw material costs for commodities are putting broader pressure. Household goods rose 0.9%, apparel rose 1.2%, and entertainment goods, education/communication goods and alcohol rose 0.4% from a year ago.

As for services, transportation services remained hot, rising 1.5% from a year earlier. Airfares rose 7.0% and car/truck rentals rose 12.1%. Meanwhile, health care remained weak, down 0.1% from a year ago.

In addition, the housing and rent indexes were relatively flat in May. The housing index rose 0.3% in May from a year ago; the rent index rose 0.2% in May from a year ago.

Overall, the reopening economy theme continued to be a major driver of CPI gains this month.

Eric Wingorad, senior economist at Alliance Bernstein, on the subject, said, “The strong performance of the CPI index was driven primarily by categories that were heavily disrupted by coronavirus infections, which remain under pressure from supply chain disruptions, and those more persistent inflation categories — categories that are doing a better job of capturing sustainable trends — remain somewhat subdued. This means that the details of today’s CPI data continue to support that the spike in inflation is temporary, even if it is more severe than most forecasters (including myself) initially anticipated.”

How should investors currently judge whether U.S. inflation will persist?

Indeed, judging from the statements of Fed officials over the past few weeks and the subtext given by this week’s CPI data, the principle of the “temporary theory of inflation” that the Fed is talking about and the market is believing is simple: consumer demand has gotten a big boost from the stimulus and the economy reopening to release pent-up demand, and the supply side is now The supply side cannot keep up.

This may be driven by the decline in inventories and capacity when demand contracted heavily during the anti-epidemic blockade, the limited willingness of workers to return to work, and the negative impact of the anti-epidemic restrictions on production. As a result, in some segments, prices are rising at ridiculously high rates (as is the case with used cars), which is pushing up the overall price level.

However, inflation will likely subside when people have spent their spare cash on hand, business activity returns to normal, and supply-side pressures subside. The sticking point is only three things: labor, consumer demand and inflation expectations.

Bank of America strategist Michelle Meyer this Thursday listed the top 12 excuses in the market right now that prove inflation may be temporary.

①The labor shortage will disappear in the fall, when unemployment benefits will be reduced and fears of a new crown of infection will subside.

②The bottleneck in commodity production is due to an exceptional shock. These will fade as production picks up and demand shifts from goods to services.

③Trade bottlenecks will also ease as the effects of previous supply disruptions recede, labor shortages ease, and demand for commodities stops growing rapidly.

④Price increases in some specific industry prices are purely temporary. As supply picks up, these price increases will disappear.

⑤Logically, any rise in prices will be temporary because there is an output gap, and sustained price increases will inevitably narrow that gap.

⑥The current wage increases are concentrated in low-paying jobs. This is a good thing, as it will help narrow the income gap.

(7) The link between pay and price inflation has weakened in recent years. Again, we should celebrate, not bemoan, rising wages.

⑧ Any pay rise is likely to be temporary, as unemployment remains too high to generate sustained upward pressure.

⑨ Michigan’s inflation expectations index has spiked, but this is an overreaction to the obvious food and energy price increases, and when price increases subside, so will inflation expectations.

⑩ Inflation expectations will rise further only after the real inflation rate remains high for some time.

⑪The inflation break-even rate is only rising moderately. If there is really an inflation problem, the bond market will tell us.

⑫A survey of professional economists believes that inflation will remain in line with the Fed’s target in the long run.

Behind Wall Street’s high: Is this really the end of the inflation crisis?

Of course, the real difficulty for financial markets now is how to test that these expectations are necessarily correct, because the magnitude of the economic rebound after the epidemic has disrupted the performance of many common indicators.

As Meyer himself says, there is some truth to all these arguments, but it is also clearly unreasonable to say that all the recent inflation problems are temporary. meyer disagrees that the fed can easily put the inflation genie back in the bottle, “we have not experienced sustained hyperinflation in recent decades, but earlier history suggests that once it starts, it is difficult to contain without triggering a recession.”

For investors and the Federal Reserve, though, at least there is a temporary sigh of relief after last night’s May CPI data.

Inflationary panic did not appear, enough to prove that the Federal Reserve in the past few months to the market painstakingly “brainwashing” finally played an effect. And the Fed in the next, can also continue to implement their own tapering plan in a step-by-step manner, without any time pressure.

Andy Richman, managing director of Sterling Capital Management, said U.S. bond yields fell back after a big jump at the beginning of the data release, showing that the market is more convinced that Fed officials conveyed the message that inflationary pressures are temporary. This is an acceptance of the Fed’s wait-and-see attitude.

According to Qin Han, chief analyst of fixed income at Guotai Junan, the market has peaked on U.S. inflation expectations. Because overseas markets gradually give up “betting” with the Fed, no longer worried that the Fed misjudged the risk of inflation and led to a sharp turn in policy.

Huatai Fixed Income pointed out that the weak non-farm payrolls data will weaken the Fed’s bottom line to deal with the upside of inflation, while non-ferrous and other commodities stage retracement, but also gave the Fed to continue to observe the motivation to spend May base effect after the high point of inflation. Unless the employment data turned significantly better or inflation data deteriorated significantly, the Fed can be large in tightening monetary policy for the time being to remain patient, the market began to accept the Fed’s view that inflation is a temporary phenomenon, the expected easing of liquidity tightening, but also conducive to the U.S. debt to go stage rebound market.

In addition, the Carlson Group also said, “In the coming months, some factors may still lead to inflation lasting longer than expected. However, it is expected that the tight supply situation and the bottleneck of global commodities will be eased during this year. Given the limited demand for services, prices will not see unlimited increases either. We still expect the Fed to likely announce signals related to tapering at the Jackson-Hall Global Central Bank Conference in August, with a formal launch of tapering likely in December or January next year.”

Interestingly, on the same day that the U.S. CPI data was released, the Fed’s weekly position data showed that the size of its balance sheet exceeded $8 trillion for the first time. This means that the Fed’s balance sheet has nearly doubled in size since the massive asset purchases were launched in March last year due to the outbreak of the new crown epidemic. On one side, the Fed’s balance sheet continues to expand at an accelerating pace, while the market makes light of the burgeoning inflation. Perhaps such a scenario, which seems somewhat plausible and self-defeating, will continue for some time.

Wonderful night! U.S. inflation exploded and Wall Street got high

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/wonderful-night-u-s-inflation-exploded-and-wall-street-got-high/
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