There’s no denying it: the US inflation print for June was ugly. The year-over-year headline figure rose 9.1 per cent and the monthly increase was 1.3 per cent, both exceeding estimates.
Energy prices were the biggest driver, of course, but rents rose quickly too, with all shelter costs up 5.6 per cent from a year ago. Jan Hatzius at Goldman Sachs points out that rents inflation climbed to a 36 year high. His colleague Frank Flight takes a more dire tone:
The opportunity for a soft-ish landing has passed and the Fed’s best hope now is inducing a recession as soon as possible to prevent a de-anchoring of inflation expectations and a wage/price spiral.
Excluding hotels and the like, inflation in rent and home prices is approaching double digits. And Jim Cramer is saying inflation has peaked, which leads us to worry that it hasn’t.
It is starting to look like aggressive monetary-policy tightening in the Americas is inevitable. Canada led the way Wednesday with a 100 basis-point rate increase, which calls to mind the country’s larger than normal share of variable-rate mortgages. The Federal Reserve’s next statement is due on July 27, before the next US consumer-inflation data point is released.
Fed funds futures were pricing in an increase of around 85 basis points at its July meeting as of mid-morning Wednesday in the US. That means another 75 basis-point rate hike is seen as a given, with a chance of the Fed going bigger.
A couple of hours after the report, CME’s (flawed) FedWatch tool was interpreting that as a 51 per cent likelihood of a full-percentage-point rate increase in July.
The question of when the Fed last raised rates by 1 percentage point is an entertaining one to answer, in part because it came before 1990, when the Fed was still only secretly targeting the fed funds rate to implement its policy. Before that it was targeting a measure of the quantity of money.
So to figure out when the fed funds rate rose by a full percentage point in the span of a month, we turn to our old pal FRED:
That’s February 1982, firmly in the Volcker era. The fed funds rate rose to 14.78 per cent from 13.22 per cent in the span of a single month.
The US has been experiencing the highest inflation since the Volcker era as well, though we must point out that energy contributed a significant amount to June’s inflation print, and that Wednesday’s figures don’t capture the recent slide in West Texas Intermediate crude.
As Morgan Stanley writes:
While core inflation pressures remain uncomfortably high, the outlook points to some inflation deceleration from here. In particular, energy price inflation is likely to reverse sharply in July on the back of falling commodity and retail gas prices, which points to a substantial drop-off in sequential headline inflation next month.
Still, the rent and food inflation figures weren’t encouraging either. And bond markets are following the standard Fed-panic formula, with short-dated Treasury yields jumping, long-dated Treasury yields declining and recession signals getting louder: 2-year yields were more than 15bp higher than 10-year yields by the US’s mid-morning hours.
That is the much-feared yield curve inversion. This inversion has been more persistent — and therefore more worrying — than the shortlived inversion that caused a bit of a stir on the internet earlier this year.
Stonks aren’t panicked, however, with the S&P 500 only down 0.3 per cent.
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July 13, 2022 at 10:47PM
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Hear that? That's the sound of 100 basis points - Financial Times
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