There is a surprising amount of movement in stocks and bonds Wednesday given the big inflation numbers ahead.
“On balance, the (bond) set up into today’s US CPI release is hawkish,” ING said. “The Treasury curve started the week by flattening, both in phases of bond market strength and weakness. This is while the Treasury auctions bonds in the 3Y, 10Y, and 30Y sectors, which one would expect to steepen the curve as the duration of the long-end auction is greater.”
“This does not mean markets have a predicting power on today’s release, but the move is likely to blunt the reaction to a greater-than-expected print.”
The headline July CPI figure is expected to have risen 0.2%, falling to an annual rate of 8.7% given the drop in energy prices. Economists expect a 0.5% rise in core CPI, with the annual pace rising to 6.1%.
“One of the Federal Reserve’s June policy errors was to focus on consumer price inflation as a policy driver,” UBS chief economist Paul Donovan said. “Consumer price inflation is volatile, its largest component is a fantasy price no one pays, and the Fed has little control over more than half of the index. But the Fed focus means it matters to markets.”
“The transitory inflation argument argued that the soaring goods demand of 2021 would fade, and thus soaring goods prices would moderate,” he added. “This has happened – US durable goods are experiencing the greatest disinflation in history, and online retail sales have moved into outright deflation.”
“Unfortunately, other sectors increased pricing power and profit margins, overwhelming the transitory argument. The Fed has to create disinflation where it can to offset the inflation it cannot control, before consumer savings run out, if it is to avoid a slump.”
Among individual issues, The Trade Desk is surging premarket following strong top-line results and outlook.