By crushing volatility in the wake of yesterday’s record-setting CPI print, the Fed might have convinced some investors that spiking inflation isn’t a problem – even if it’s not transitory. The charts — and the math — suggest they might become skeptical again very soon.
The departure of CPI from the gasoline delta curve illustrates how inflation is no longer just an oil/gas problem – and thus wouldn’t be “fixed” by a modest decline or leveling off of oil/gas prices.
Can the algos be convinced to ignore both the math and the charts?
The 10Y has nearly reached the downside target we’ve maintained for the past couple of months, but would the algos ignore a breakdown? It seems unlikely.
Of course, there’s a fundamental argument as well. The biggest risk to rising inflation as far as the markets are concerned is higher interest rates. By crushing rates (and shorts) at a time when they would normally be spiking higher, the Fed has seemingly eliminated that threat.
Higher inflation will be hard on working stiffs across the country, of course. Higher car prices, gas, rent, food…the people the Fed swears it cares the most about are the least capable of absorbing these expenses – transitory or not. Unfortunately, the market could care less
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