- Weekly Wizdom
- ETFs vs. Inflation
ETFs vs. Inflation
Inflation traders are positioning for a slightly bigger-than-expected blip higher in the annual headline rate of Thursday’s consumer price report for December, one that shouldn’t matter much to the overall downward trajectory of price gains this year.
As of Tuesday, derivatives-like instruments known as fixings were trading around levels that imply December’s annual headline CPI rate will come in at 3.3%, up from 3.1% in November and slightly above the 3.2% level expected by economists.
According to several economists and strategists, two factors likely to contribute to a somewhat higher annual headline CPI inflation rate in December relative to November are airfare costs and vehicle insurance, which are expected to show short-lived bumps.
If the report comes in as expected, it should make the market comfortable with their pricing of 3 cuts this year. If we see an upside shock, we will see the market reprice cuts and possibly see risk markets sell-off.
Starting in March, Fed officials are trying to temper the market’s expectations for as many as six or seven rate cuts this year. On Monday, Atlanta Fed President Bostic said two quarter-point rate cuts will likely be needed by year-end versus the three cuts telegraphed by policymakers in December. Meanwhile, Fed Gov. Bowman said that while inflation might keep falling without more rate hikes, easing financial conditions could cause a reacceleration of price gains.
Accurately predicting the path of inflation matters because of the widespread view that it is in the final mile. However, financial markets continue to price in far more rate cuts than Fed officials have signaled — creating the potential need to pull back on those expectations for the Fed funds rate target, which currently sits between 5.25%-5.5%.
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