New Week, More Fireworks As US Inflation Data Looms

After a fairly dramatic stretch in rates amplified by BoE hawkishness and Christine Lagarde’s newfound willingness to countenance the idea of an ECB rate hike in 2022, traders turn to US inflation data in the new week.

The numbers won’t be anyone’s idea of benign. Consensus is looking for 7.3% on the headline gauge. Core prices likely rose almost 6% YoY (figure on the left, below).

It’s hard to say whether this is “priced in.” The January jobs stunner and accompanying above-consensus wage growth figures prompted traders to price a coin flip’s chance of a 50bps move at next month’s FOMC meeting. Pricing for 2022 is very aggressive (figure on the right, below).

Earlier in the week, officials sought to downplay the idea that liftoff would come in the form of a half-percentage point hike. But the emphasis on policy being “data-driven” means incremental evidence of inflation pressure will be read by markets as a reason to push the issue.

At some point between now and the March gathering, officials may have to push back more forcefully, unless they’re planning on playing 3-D chess, allowing the market to get ahead of itself so they can deliver a “dovish hike.” Or unless they really are pondering a 50bps move.

“We remain in the 25bps March hike camp, although will acknowledge the combination of a hawkish BoE/ECB and the NFP gains certainly bolster the 50bps argument,” BMO’s Ian Lyngen and Ben Jeffery remarked, noting that “for continuity and predictably, we’re operating on the assumption that a cadence of 25bps per quarter will create the backbone of this hiking campaign, with the off-cycle meetings providing the FOMC the opportunity to incrementally speed up the pace if the data warrants.”

So, if you do believe the data creates extra urgency, but you doubt the Fed’s resolve (or capacity, given the risk of inverting the curve) to deliver 50bps increments, evidence that inflation isn’t abating argues for non-SEP meeting hikes.

“The rates curve penciled in more rate hikes in 2022 [following the jobs report] and the market’s pricing for a 50bps hike in March also increased,” TD’s Jim O’Sullivan and Priya Misra wrote. “While we do not believe the Fed needs to raise rates in 50bps increments, investors may continue to pencil in some chance of a 50bps hike due to uncertainty about inflation,” they added.

Supply could add to pressure on Treasurys. The combination of CPI and this week’s refunding auctions means 2% on 10s is most assuredly in play (figure below).

All of this comes with the usual caveat that the US economy is guaranteed to slow materially in Q1. The jobs report was encouraging, but it was also very difficult to parse. It still seems questionable, at best, that the Fed will be able to deliver on lofty expectations for tightening in 2022. Rate hikes have to be funded by growth. If they’re not, policy tightening will (by definition) be an aggravating factor in a slowdown.

As for equities, your guess is as good as anyone’s. Last weekend, I suggested everyday people hadn’t a snowball’s chance in hell of tactically trading stocks last week. That pseudo warning proved prescient.

“The operative question is whether the current price action [in rates] is a fade or a go-with move,” BMO’s Lyngen said. “While we are apprehensive the Fed will be able to execute more than four or five hikes this year without triggering a significant reversal in risk assets, it’s too soon to fade the selling pressure and collective hawkishness.”

Also on deck in the US: NFIB, the preliminary read on University of Michigan sentiment for February and, of course, claims.