Buckle Up For Inflation With Bond Volatility Thrown In

Buckle Up For Inflation With Bond Volatility Thrown In

By Laura Cooper, Bloomberg Markets live commentator and analyst

Brace for base effects with a heady acceleration in U.S. inflation ahead. Bonds are getting a head start with the U.S. 10-year yield approaching 1.70%, helping to boost the greenback. Of course, it’s impossible to interpret the figures as hints of overheating, but look for U.S. stocks to be spooked by an upside surprise after markets pared back tightening bets this month.

Inflation risks are skewed to the upside with a bottom-up approach suggesting more than base effects at work. A jump in gas prices alongside rising food costs underpin headline CPI consensus of 0.5% m/m in March, widening the gap between the core gauge. While the Fed focuses on the PCE deflator, that tends to run below CPI, an upside surprise after recent quiescent price action can send S&P 500 futures lower. And spark bond market volatility, with the 30-year auction another event risk ahead.

At least there’s some clarity on outcome-based forward guidance with the Fed’s James Bullard signaling the U.S. reaching 75% immunization as a necessary condition for taper talk. That implies late summer at the current rate and compares to roughly five months for the U.K. with the EU about a year away. But the Bank of England isn’t in a hurry to ease bond buying, even as signs of unleashed pent-up demand unfold.

At least that’s the case looking at lines outside U.K. shops, and backed by high-frequency gauges. But much of the recovery appears baked in with rates pricing largely unchanged and cable struggling for upside this week. The U.K. will lock in long-term borrowing costs in a long-bond auction today –- so at least here, it’s brace for borrowing — and more buying.

Tyler Durden
Tue, 04/13/2021 – 07:33

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