“Macro vol is back,” Deutsche Bank’s Alan Ruskin declared, following this week’s shocking CPI report, which represented the second consecutive top-tier “jaw-dropper” (to quote Christopher Waller) after last Friday’s huge downside NFP surprise.
Base effects notwithstanding, the YoY pace of consumer price inflation “is very likely to creep into the general public’s psyche,” Ruskin went on to say, before suggesting that if there’s any “good news for the Fed,” it’s that this week’s data “was so bad” it may mean “the bad news on inflation was all front-loaded.”
Fingers crossed on that. Friday produced evidence that the “general public” is indeed starting to notice. University of Michigan sentiment missed estimates in the preliminary read for May thanks largely to one of the biggest monthly surges in year ahead expected inflation on record.
Still, things had calmed down considerably by the weekend. 10-year yields were a mere 5bps cheaper versus a week previous.
“We’ve seemingly pulled forward what we can for now on the ‘inflation overshoot’ narrative, all while the Fed continues to message ‘transitory’ while being able to [reference the] shortfall in the April jobs data [to] justify a continuation of dove-speak,” Nomura’s Charlie McElligott said, referencing the “calm” in US rates.
BMO’s Ian Lyngen and Ben Jeffery offered a characteristically incisive take on Friday afternoon. It’s not, they said, that “the chorus of an [inflation] avalanche has gone unnoticed by investors and monetary policymakers.” Rather, it’s that nobody knows what comes next.
That abject uncertainty “remains the operative driver of the macro assumptions that have resulted in 10s closer to 1.50% than 2.0% despite levels of inflation not seen since CPI was >10%, Fed funds ended the year at 13%, the Dow was at 875, and the median price of a home was $78,200,” they added.
Clearly, additional hot reads on inflation (and you can be sure more are in cards, even if they do prove transitory) have the potential to derail the Biden administration’s fiscal plans, or at least to force a rethink on the size of the proposals. Republicans have seized on the inflation talking point and after this week, they have more ammunition.
Read more: Talking Points
Beyond that, though, Jerome Powell himself is under the microscope.
Although he probably shouldn’t be blamed in the event something goes “wrong” (after all, he’s really just along for the ride at this point), his legacy is now inextricably tied to the experiment over which he’s jointly presiding (with Biden and Yellen).
“The worse the inflation outlook, the more the pressure for someone other than Powell [to be Fed Chair], likely someone more hawkish!,” Deutsche’s Ruskin exclaimed, in the same note cited here at the outset.
“Markets haven’t even begun factoring in the chance of such a shift,” Ruskin added, noting that “Powell is widely viewed as being exceptional in marshaling economic forces to fight the COVID fallout, but he got stuck signaling too far ahead, fighting yesterday’s disinflation wars.”
And to think, it started with Powell hiking rates until something broke (namely, the US stock market, in Q4 2018). Fast forward three years and he’s the proud owner of the lowest rates in 5,000 years.