Inflation Reignited?

Inflation Worries? 

Should we be concerned about a reacceleration in inflation? Last week Powell warned about “head fakes” and the consumer is not relaxed about where prices are heading. UoM year-ahead inflation expectations inched up to 4.4%, indicating that the large increase between September’s 3.2% reading and October’s 4.2% reading was not a mistake or a one-off. The current reading is the highest since April 2023 and remains well above the 2.3%-3% range seen in the two years prior to the pandemic. Long-run inflation expectations also rose to 3.2%, the highest reading since 2011. This does not appear isolated: Conference Board one-year-ahead inflation expectations jumped to 5.9% in October. Meanwhile, the ECB’s de Guindos is out on the wires this morning to say he expects a temporary rebound in inflation in the coming months…will this temporary rebound be the new transitory? The paradigm has changed. 

The Fed Might be Worried 

...hence a bit of a pushback against the curve last week from Powell. All eyes fall on the US CPI inflation report tomorrow. Core inflation ticked higher in September – a worrying sign for the Fed that more interest rate rises may be required. The headline CPI index rose 0.4% on the month and 3.7% from a year ago, which was above forecasts for 0.3% and 3.6%. Core CPI increased 0.3% on the month and 4.1% on a 12-month basis, in line with expectations. Sticky inflation could see the Fed raise rates again should it not start to come down enough. The CPI is forecast at 3.3% in October, whilst the core CPI is expected to remain at 4.1%.  

UK Labour Market Data  

Recent signs of an increase in jobseekers' points to fresh slack and supports the view of the Bank of England that it’s probably done with raising rates. And on Wednesday we get the UK CPI print – which is expected to fall sharply to below 5% from 6.7% in each of the previous two months…as long as it does the market can stick to the notion that the BoE may well be cutting in the first half of next year. 

Bulls Pawing 

Powell’s pushback was not enough to quell the stirrings in the loins of the bulls. European stock markets rallied early Monday in a bit of a catchup to the gains on Wall Street on Friday. The FTSE 100 rose over half a percent to reclaim the 7,400 handle, whilst the DAX rose towards 15,300. US stocks capped a second week of gains with a strong bounce on rally as yields flatlined; the Nasdaq jumping 2% to finish up 2.4% for the week as Microsoft his a fresh all-time high during the session. Oil rose a bit on Friday but was still down 4% for the week and listing sideways this morning with Brent futures around the $81 mark and WTI a trad under $77.  

MS on US Equities 

“...a 'higher for longer' rate backdrop is increasingly weighing on both corporate and consumer sentiment … earnings headwinds will likely persist into early next year before a durable recovery takes hold.” Also this week – watch the Biden meeting with Xi of China and another episodic US government shutdown kerfuffle.