We got another taste of the old “good news is bad news” mindfuck on Friday morning when a hotter-than-expected CPI print translated directly into this for markets:
Of course by the end of the day, stocks shook it off, but the point there was that “good news is bad news” is at the heart of the “Goldilocks” narrative that’s helping to prop up risk assets and that formed the basis for Wall Street’s 2018 equities outlook pieces.
Bottom line: you do not want “too much” inflation pressure, because a sudden uptick in inflation could cause central banks to effectively revoke the market’s license to co-author the policy script by getting overly aggressive with the “hawkish” forward guidance. Recall this chart (note the yellow bar):
And look, we’re not just making this shit up. About the same time we ran our piece on this following the CPI print on Friday, Bloomberg ran a similar post. “If nothing else, it’s a reminder that the ‘Goldilocks’ regime in which the economy is ‘just right,’ with low inflation amid a global synchronized expansion lifting earnings and asset prices, won’t last forever,” Luke Kawa wrote yesterday morning, adding that “good news could become bad news if investors perceive that the Federal Reserve will be forced to raise interest rates aggressively to combat inflation.”
Well conveniently, BofAML is out with the latest installment of their rates and FX strategy survey series from which the second chart shown above is taken and it betrays a bit of a conundrum for anyone who’s looking for a restoration of the reflation trades that were “no-brainers” headed into last year.
“The majority of respondents see higher core inflation as the necessary ingredient for higher rates and a higher USD,” the bank writes, recapping the results of their latest poll. Here’s the chart:
The irony, again from BofAML, is this: “higher US core inflation is precisely the risk that investors see as increasingly most underestimated at this stage.”
And there it is – again. We’ve spent a decade looking for it and now, everyone is praying we don’t find too much of it.