{"id":10365,"date":"2023-11-14T17:55:32","date_gmt":"2023-11-14T17:55:32","guid":{"rendered":"https:\/\/lendingsensibly.com\/markets\/wall-street-is-bracing-for-inflation-data-that-includes-problematic-undertones-for-the-fed\/"},"modified":"2023-11-14T17:55:33","modified_gmt":"2023-11-14T17:55:33","slug":"wall-street-is-bracing-for-inflation-data-that-includes-problematic-undertones-for-the-fed","status":"publish","type":"post","link":"https:\/\/lendingsensibly.com\/?p=10365","title":{"rendered":"Wall Street is bracing for inflation data that includes problematic undertones for the Fed"},"content":{"rendered":"
\n

Just as consumers\u2019 expectations for inflation are moving higher, Wall Street firms are now preparing for the likelihood that Tuesday\u2019s consumer price index for October will reflect underlying problems for the Federal Reserve.<\/p>\n

The reason is that core readings, which kick out volatile food and energy prices to present a purer read on inflation trends, aren\u2019t expected to have budged. Barclays
\n BARC,
\n +1.26%<\/bg-quote>,<\/span>
\n BNP Paribas
\n BNP,
\n +0.39%<\/bg-quote>,<\/span>
\n and BofA Securities
\n BAC,
\n +5.72%<\/bg-quote>
\n are forecasting a year-over-year core inflation rate of 4.2% as of last month \u2014 a touch above economists\u2019 estimates \u2014 after factoring in a monthly reading that either stayed at 0.3% or nudged up to 0.4%. <\/p>\n

\n

What\u2019s more, the slimmer gauge known as supercore inflation, a measure of services that excludes energy and housing, is expected to land well above the Fed\u2019s 2% target again. This all comes just after Fed Chairman Jerome Powell has expressed wariness over \u201chead fakes\u201d from inflation, and last week\u2019s University of Michigan surveys of consumers found both year-ahead and long-run inflation expectations heading noticeably higher. <\/p>\n

Read: What Is Supercore Inflation? It\u2019s the Fed\u2019s new favorite inflation gauge, so what exactly is it and why is it important?<\/p>\n

Tuesday\u2019s release still has the potential to offer some comfort to investors because of an anticipated drop in the CPI report\u2019s headline figures. However, the big-picture worry is that measures least sensitive to volatility are solidifying above the Fed\u2019s 2% target and inflation expectations could come unanchored the longer that this goes on. <\/p>\n

\u201cThe market has, from what we\u2019ve seen in the past, looked at inflation\u2019s downward trajectory as a whole and assumed that the Fed is done with rate hikes. And if we see a continued downward trajectory [in headline figures], the market is going to price that in,\u201d said Lauren Henderson, an economist at Stifel, Nicolaus & Co. in Chicago. <\/p>\n

\u201cBut I think the supercore, or core services excluding shelter, is going to be of importance,\u201d she said via phone. It came in at 3.6% last time, based on data from Haver Analytics and derived from the Bureau of Labor Statistics, \u201cand we think it\u2019s going to stay somewhat elevated at around 3.5% to 3.6%. Because we\u2019ve had so many volatile components in inflation measures since the pandemic, this measures inflation in a more detailed way and acts as a proxy for the wage-price spiral that Fed officials so greatly fear.\u201d<\/p>\n

With price gains taking a long time to fall back to the Fed\u2019s 2% target, investors and analysts have been counting on a slowdown in the U.S. economy to cure the inflation problem. Now, however, some are considering another possibility: the potential for a more stagflation-lite environment, in which inflation remains sticky even if demand falls because price gains are baked into long-term items like wage contracts. <\/p>\n

Indeed, the latest University of Michigan consumer survey shows just how difficult the path ahead could be for policymakers and financial markets. Year-ahead inflation expectations moved up to 4.4%, \u201cindicating that the large increase between September\u2019s 3.2% reading and October\u2019s 4.2% reading was no fluke,\u201d the university said. And long-run expectations rose to 3.2% in November from 3% last month, the highest reading since 2011.<\/p>\n

Henderson said there\u2019s a \u201crisk is that inflation expectations, which have been pretty rangebound, could continue to rise as inflation remains well above 2% \u2014 and that could add further complications for the Fed.\u201d <\/p>\n

\u201cWe think the Fed is close to the peak, but that there\u2019s still further price pressures in the economy that will make the Fed have to hike at least one more time or keep rates elevated for longer than the market is expecting,\u201d she said. <\/p>\n

Higher inflation expectations on their own would likely be enough for the Fed to hike rates again without hesitation, a team at Barclays wrote in a note on Saturday, citing comments made by Fed Vice Chair Philip Jefferson last week. Jefferson said that in some cases, the cost of the Fed doing too little may outweigh the cost of doing too much, such as when inflation expectations are at risk of becoming unmoored. <\/p>\n

\u201cThere\u2019s a lot of uncertainty about where the economy is going to be in six months,\u201d said Will Compernolle, a macro strategist for FHN Financial in New York. \u201cSupercore is still high at above 3% and the Fed, which has been relying on long, variable lags in monetary policy to make an impact, has been as surprised as anyone else. I don\u2019t think stagflation is particularly likely, but if we do see [an economic] downturn, that will probably bring inflation down to 2.5% and require the current level of restrictiveness in rates, at 5.25%-5.5%, to become even more restrictive.\u201d<\/p>\n

On Monday, Treasury yields finished little changed ahead of Tuesday\u2019s CPI report for October, while U.S. stocks
\n DJIA<\/p>\n

SPX<\/p>\n

COMP
\n closed mixed. Traders of derivatives-like instruments known as fixings now expect to see a total of four CPI reports, including October\u2019s, that produce annual headline inflation readings of above 3%.<\/p>\n<\/p><\/div>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Just as consumers\u2019 expectations for inflation are moving higher, Wall Street firms are now preparing for the likelihood that Tuesday\u2019s consumer price index for October will reflect underlying problems for the Federal Reserve. The reason is that core readings, which kick out volatile food and energy prices to present a purer read on inflation trends, aren\u2019t expected to have budged. Barclays BARC, +1.26%, BNP Paribas BNP, +0.39%, and BofA Securities BAC, +5.72% are forecasting a year-over-year core inflation rate of 4.2% as of last month \u2014 a touch above economists\u2019 estimates \u2014 after factoring in a monthly reading that either<\/p>\n","protected":false},"author":1,"featured_media":10366,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[39],"tags":[],"class_list":["post-10365","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-markets"],"yoast_head":"\nWall Street is bracing for inflation data that includes problematic undertones for the Fed | LendingSensibly<\/title>\n<meta name=\"description\" content=\"Just as consumers\u2019 expectations for inflation are moving higher, Wall Street firms are now preparing for the likelihood that Tuesday\u2019s consumer price\" \/>\n<meta name=\"robots\" content=\"index, follow, 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