Views are my own. Just my thoughts on macro developments. Not investment advice.
The market is broadly expecting a weaker inflation print today. This can be seen in the continued fall in US inflation swaps.
The market is starting to feel a lot like it did in August 2022. In August 2022 some weak ISM Prices Paid along with some other weaker inflation data had the market convinced that inflation “had peaked”. Powell’s press conference after the July 27th FOMC was interpreted as a Fed Pivot due to Powell saying they needed to remain “data dependent”. This allowed Animal Spirits to reignite. Nasdaq had rallied 12% and full meme-stock and crypto mania started to resume as can be seen in the chart of Bed Bath & Beyond below. A whole host of FOMC speakers then came out in early August to push back against the easing in financial conditions. Fed’s Daly said firmly “Work on inflation is no where near almost done”. The market chose to ignore these warnings from FOMC members until Powell really drove the message home himself at Jackson Hole and the USD trend higher resumed in full force. The current market set up feels eerily similar to me. Many indicators of inflation are now pointing lower and the market is convinced inflation has peaked. The FOMC are extremely hawkish, Daly is again declaring that it is too early to “declare victory” over persistent inflation. The market is ignoring the FOMC and focusing on the weaker data and now Animal Spirits are reigniting again. You can see this from the >60% rise in Bed Bath & Beyond yesterday, a company that has just warned that it may file for bankruptcy… These kind of moves extend to a broad selection of meme-stocks as well as Crypto. I still feel that it is too soon to declare victory against inflation and that global central banks will need to remain hawkish even as data turns lower. This stagflationary scenario should be bullish for USD, CHF and XAU and bearish for risk assets. Of course a lot depends on the US CPI print today. Bloomberg expectations are for 0.3% MoM core CPI, I feel that actual expectations are 0.2% or lower so it feels like the bar is high for a soft print. We may be a lot further along in our fight against inflation than we were in August 2022 but I think the market is making the same mistake of declaring victory too early.
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