Stocks Week Ahead: Inflation Swaps Suggest Hot CPI Report Could Be in the Offing
This week will be another in-focus week, with the CPI and PPI reports coming toward the week’s end.
Additionally, 3 Treasury auctions will be front and center as well. This will follow a fairly previous strong week of data, which suggests the US economy is hanging in nicely.
Currently, Bloomberg Economics GDP Nowcast is forecasting fourth-quarter growth of around 2.3%, which is slower than the roughly 5% third-quarter print but still a respectable growth rate.
Coupled with a roughly 3% inflation rate, nominal growth is still around 5ish %. Again, it is a health level.
Given a 5% nominal growth rate, I think it will be tough to see the Fed cut rates at the moment as aggressively as the market has priced in.
As of the third quarter, Nominal GDP y/y growth was still above the Fed Funds rate, and even with a 5% nominal growth in the fourth, the Fed Funds rate and nominal growth would be almost equal.
It isn’t until the Fed funds rate is 0.5% to 1% higher than nominal growth that downward pressure is exerted on the economy, and the odds for recession seem to increase.
So I think, at the bare minimum, the Fed can continue to be patient and see what the data says, and the CPI report this week may or may not help that cause.
The median expectation is for an increase of 3.2% in December, while inflation swaps are priced at an increase of 3.32%.
If we look back at the data over the last few months when rounding to the nearest 0.1%, swaps have only overestimated CPI 1 time out of the last six times.
At the same time, the median has overestimated the actual CPI 3 times.
So, if we care about when the CPI has come in hotter than expected, the inflation swaps have had a better run, so one should be mindful of the risk that CPI comes
Read more on investing.com
