Economists thought US inflation would keep slowing in August as energy prices fell. But shelter costs didn’t co-operate, so it’s time to break out the tin hats.
US equity markets are a sea of red on Tuesday morning, with the Nasdaq down around 3.5 per cent and the S&P 500 off 2.8 per cent around 11am.
The real mess is happening in the rates market, however.
This correspondent is old enough to remember when it was notable to see the 2yr yield rise above 2 per cent. Now we’re up ~17bp at 3.7 per cent, with the 10-year trading at 3.4 per cent.
Futures markets are pricing in a 75-basis-point rate increase at next week’s Fed meeting, via CME’s FedWatch.
One silver lining here is that, even with the White House talking about inflation being “essentially flat” over the past two months, there are more interesting topics here. Economists and pundits like to say that Americans are especially sensitive to gas costs, but the unexpected strength in food and shelter costs are not especially helpful for the argument inflation has peaked.
For a further breakdown, here are a couple of nice inflation heat maps from our pals at CreditSights. First the year-over-year:
And now for the monthly figures:
This is probably bad news for corporate credit markets, as the firm’s strategists write:
If a 75bp increase by the Fed at the [September] meeting was not a given prior to today’s release, it surely is now. The Fed fund futures market is now pricing in a small possibility of a 100bp hike. We think the Fed is now locked in for 75bp . . . This is a negative development for corporate credit as any hopes of a dovish shift by the Fed have been dashed.
The Fed is now expected to raise rates above 4 per cent in early 2023 this hiking cycle, futures markets show. In other words, interest costs are going up for even the safest borrowers (at least those who have to refinance this year or next). LQD, the biggest investment-grade corporate-bond ETF, is down around 0.9 per cent.
The silver lining? We won’t have to lose any time or brain cells reading arguments about basic arithmetic from people trying to describe what happened with inflation.
Source: Economy - ft.com
