My key takeaways after the next inflation day:
1) Red-hot inflation is bad news for short-term investors, the fourth monthly CPI reading in a row is a negative surprise and once again we have a strong jump in the yield of 10-year UST - see Figure 1. It may also be the beginning of a deterioration of the good sentiment on the stock market, which should get the message from higher interest rates at some point…
2) But for investors with a medium investment horizon, the second half of 2024 may bring positive surprises in terms of lower inflation, weaker growth, falling bond yields and greater chances for a soft landing scenario
3) In the current cycle, the market is completely unable to predict inflation, and therefore the path of Fed rate cuts, so it is difficult to assume that after yesterday's inflation it is any better... see Figure 2, as a reminder:
March 24, 2023, the epicenter of the regional banks crisis, which turned out to be a nothing-burger - the market was pricing in the first rate cut already in June 2023,
October 17, 2023 - the epicenter of the HFL (higher for longer) narrative, 10Y UST yield was 5%, the market estimated the first cut only in August 2024. Then, it was the perfect time to buy long US treasuries, e.g. iShares TLT ETF - which delivered a return rate of approximately 22% in the next 2 months,
January 12, 2024 - the market priced in 7 rate cuts by the FED in 2024
April 10, 2024 - the market estimated only 1.5 rate cuts in 2024
4) Yesterday's inflation is a big problem for political incumbents in an election year.
Bloomberg's Chris Antsey:
“Obviously, this is very bad news for Joe Biden. It’s still only April, and we’ll have another half-a-year’s worth of inflation reports before the election. But we’re approaching the point where high inflation is bound to still be in voters’ minds when they head to the polls, regardless of how the price figures come in over summer.”
President Biden joined the public discussion on rate cuts yesterday:
"Well, I do stand by my prediction that, before the year is out, there'll be a rate cut. This (March inflation report) may delay it a month or so, I'm not sure about it. We don’t know when the FED is going to do for certain.”
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