‘Totally Fixated’

‘Totally Fixated’

The inflation situation got real Wednesday, as April’s hotly anticipated CPI numbers came in… well, hot, spooking an already nervous market and prompting traders to again reassess the outlook for US monetary policy.

Consumer prices surged the most in more than a decade last month, and core prices the most since 1982. Both prints far outstripped economists’ estimates.

US equities promptly tumbled in the one of the worst sessions of 2021 (figure below).

It was the third consecutive daily decline.

“We continue to see an equities market which is totally fixated and wary of forward inflation,” Nomura’s Charlie McElligott said, emphasizing investors’ obsession with the idea that the Fed will be forced to start the taper discussion sooner than anticipated.

“Accordingly, the story remains the same, as it’s all about demand for downside,” he added.


Put skew, McElligott noted, is “crazy-bid” versus “simply zero” appetite for chasing upside in the index.

The inflation numbers weighed on bonds, with yields cheaper by 6bps out the curve. The 2s10s bear steepened pretty sharply. Five-year breakevens reached the widest since 2005 (figure below).

“While the primary components that contributed to the massive increase in consumer prices included used autos (chip issue) and travel and dining-related prices (as the world comes back on line), there was nonetheless the question of whether the upside was truly transitory or the start of a cycle of reflation that reaches beyond the Fed’s ability to effectively manage price pressures without bringing forward rate-hikes,” BMO’s Ian Lyngen and Ben Jeffery wrote. They were surprised rates didn’t sell off even more.

Weakness in bonds left nowhere to hide for investors scurrying to avoid losses. Only energy shares managed to gain on the day.

As is so often the case, days when the dollar is buoyant are especially perilous. The greenback had one of its best days of 2021 (figure below). That weighed on gold, which tumbled.

“Dollar bears, who support their argument by pointing to the expanding twin-deficits, may need to reconsider positions as expectations for Fed rate hikes build,” Bloomberg’s Robert Fullem wrote, noting “if yields rise, even as the balance sheet grows, dollar carry may return with a vengeance.” 

Obviously, tech (and hyper-growth) shares didn’t take the inflation data well. It was another horrific session for Cathie Wood’s flagship fund, for example, which dropped nearly twice as much as the Nasdaq 100.

It was the tenth daily decline in a dozen sessions for ARKK. That is a truly dastardly run.

“Most inflation hawks felt that it might take six months of inflation upside misses to undermine the Fed’s complacency,” Deutsche Bank’s Alan Ruskin wrote, in a Wednesday note. “The fallout of a single big report is that the forecast miss forces some immediate rethink,” he added, before suggesting that although the Fed risks “losing credibility by shifting their policy thinking in the short-term,” it might be preferable to “cop to it” now as opposed to “risking much greater fallout if they get it wrong longer-term.”

Barring a sharp reversal in next month’s CPI data, Ruskin said “the most credible thing” for the Fed to do may be to pivot and remind the market that “we always said our policy would be outcome based, and outcomes have changed.”

4 thoughts on “‘Totally Fixated’

  1. The clarity that was expressed by the Biden Election and pervasive deficit spending ritual that followed ended last week. The “all in ” cycle ended with a timely liquidation Friday and Monday in my case… Lots of help from this blog and was impossible without it…Thanks..
    Next narrative .. will need some ideology questions answered..

  2. Might be that the history books will call this the ‘Panic Age’. I suppose the instantaneous transmission of any thought around the globe might have something to do with that. Seems to be a problem when the audience is a bunch of nervous primates who are programmed to believe there will never be enough to go around. Have you seen pictures of what people were doing at gas stations in the southeast when they heard there might be a gas shortage. Guess we’re lucky no one got shot. Just a hint of inflation and the fuse is lit.

    When I was a kid there was this thing called something like the Crazy Eight Ball. A round black thing about the size of a large grapefruit with a little window. You asked a question, then shook the ball to get the answer. Now we have the stock market.

  3. We have received clear signals that inflation is coming in stronger than expected.

    The value of the dollar will depreciate.

    Therefore, everyone should sell everything so that we can all have more dollars.

    Confused yet?

    I think implicit is this idea that the Fed will raise rates, and therefore the money supply will reduce, and therefore we will actually have deflation. In other words, signs of inflation imply deflation.

    Or said yet another way, the market is fine with inflation as long as they’re anticipating to get more of it. It only becomes a problem when they think they might get less of it. Or something like that.

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