Stronger than expected US inflation data for September has the bond market now considering the risk that the Federal Reserve could end up being forced to increase interest rates into a stagnating economy with persistently higher price rises
Consumer price index readings have been 5% or higher on a year-over-year basis for five straight months, undermining the transitory theme put forward by central bankers. Bond traders reacted to Wednesday's report by sending Treasury yields lower with maturities of seven years and out, causing the widely followed spread between two and 10 - year bonds to narrow.
The Wednesday market moves are important because they signal what some economists say is a shift that s under way in the minds of traders and investors. Until recently, many had chosen to give the Fed the benefit of doubt, siding with the central bank s transitory narrative that inflation will be transitory.
However, the fall in Treasury yields Wednesday had the CPI data included a surprising temporary decline in the 5-year yield TMUBMUSD 05 Y to as low as 1.047% with the exception of rates between the 3 month bill and the 3 year note that moved higher, analysts said.
Earlier in the day, the Dow Jones Industrial Average DJIA suffered a price drop of around 100 points before recovering. The Dow Industrials then went higher by less than 0.1%, while the S&P 500 SPX erased its earlier losses and was up by 0.3%. The tech-heavy Nasdaq Composite Index is up by 0.7%.
In a phone interview, the inflation numbers weren t great and people think that the Fed is not going to let inflation get out of hand, said David Petrosinelli, a senior trader at InspereX in New York, in a video interview. Right now there are a bunch of things going on. One of them is that the Fed could be forced to unwind QE purchases faster than Chairman Jerome Powell would like. The policy error would be that the Fed waited too long to hike and could have to hike by too much. The data released on Wednesday showed consumer price gain of 5.4% year-over-year, rising following the 5.3% consensus estimate, and staying at a 30 - year high. That is more than double the Fed s 2% target for the Fed and confirmed fears that many forecasters have been underestimating the underlying strength behind recent inflation surge. Echoing a similar sentiment on Tuesday was Atlanta Fed President Raphael Bostic, who said the rise in inflation should not longer be considered transitory, in an apparent break with other Fed leaders.
Minutes of Fed meeting : September 21 - 22, released Wednesday showed that policy makers discussed a plan to reduce asset purchases by 15 billion per month, but several of them preferred a more rapid reduction. Furthermore, the tapering process could begin in either mid-November or mid-December, the minutes showed.
The Fed has held the target for the Fed budget rate between 0 and 0.25% since March 2020, to support a pandemic-stricken U.S. economy If interest rates break later this year, it can no longer be that of course.
Inflation fears are likely already starting to depress consumer and business confidence, though the September data reflected moderate growth in prices relative to mid-year, said Rick Rieder, chief investment officer of global fixed income at BlackRock Inc. managing $2.7 trillion in fixed-income assets.
Policy makers have generally navigated the economic side of the COVID crisis decently, although they appear to have fallen behind the curve in the last six months or so, Rieder said in a Wednesday note. It would be greatly disappointing to see the central bank not only stumble on the landing but in fact stick, in a way that impulls the recovery. Listed among the buyers, investors step into the Treasury market from a variety of accounts, including central banks, said trader Tom di Galoma of Seaport Global Holdings in Greenwich, Connecticut. Decent demand was also received overnight by investors from Japan and China, while U.S. hedge funds were forced to cover after selling off Tuesday night.
Is this economy going to see 2% to 3% GDP growth? Direntino di Galoma said by telephone Wednesday morning, via the same phone. There are a lot of constraints in the economy, as far as supply and demand issues, that seem to be causing inflation that we re seeing. It seems that Fed officials have waited too long to make the decision of tightening and then start cutting back on all the QE they have been doing. How stock investors can make sense of supply chain chaos?
We were at a point where things aren t clicking as they should be, and Powell is being forced into a position of scale back QE at a time when it should have been done six months ago.