Markets Looking ‘Wobbly' on Inflation Expectations: Slok

Bloomberg

2 days ago

00:00
Let's sit on the data we get later this morning at 830 Eastern time. To what extent do you believe the inventory management has delayed some of the pass through and how many more months do we need to see of data before you get comfortable that we've seen the limits of this? That's exactly right. That's why this interest data for the inventories, the sales ratio, first, companies were building inventory as well. Of course, we say alternatives come in and inventories have now been running down, especially for retailers. And now those inventories are down now to a more normal level. So now we are getting into a situation where companies are pricing goods not so much on whatever is left in the inventory because there's not much left in the inventory. It really is the new price that includes tariffs. And that's likely why the number this morning. What is most important is not only what's happening on the good side where most of the worries about inflation, but the fact that is in prices paid for services also showed a very strong uptrend in the latest data is telling you that for a long time the story was all it's all about goods. Services is fine, but the fact that ISE services paid for the last several months have started to move higher is telling you that there is a bigger risk, in particular also with deportations, at the same time removing Labor from the economy. That means more upside pressure on wages, especially in the sectors where are not documented Immigrants are working. That all means that service sector inflation could also be a very important part of the number that comes out here. Are you seeing this show up in inflation expectations? Survey based inflation expectations of consumers can be very volatile. What are you seeing in markets? Well, so the one year head swap, meaning what does the market price and this is people putting real money in betting on what will headline CPI be in 12 months time is currently pricing that inflation at this time next year. In 12 months, time will be 3.3. That's significantly higher than the Fed's 2% target. So that's also telling you that the market is pricing, that inflation expectations have almost become unanchored already. Is that because people think that inflation will be higher on its own, or is it because the expectation now is that the Fed will be cutting and therefore there will be even more impulse to inflation, not only from tariffs and only even from the dollar depreciation, but also from potentially the course that's coming from producing? It is I still think the risk is that the market is beginning in the long end to look a little bit more wobbly when it comes to inflation expectations. Markets are broadly speaking, especially when you take last week's auctions for treasuries. There was a number of issues with three year tenure auctions last week where you begin to worry about, well, if we now have on top of the fears that inflation might be moving higher then rates in particular in the long end could also be moving higher simply because of the significant fiscal issuance. And Treasury issue is still in the pipeline.