"No Panic": Markets Surge As "Transitory Inflation" Narrative Reasserts Itself

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It seems that the "non-transitory" inflation panic that gripped markets yesterday, resulting in the biggest one-day drop in the S&P since February, is gradually transitioning to "transitory" again, even though today's y/y PPI print of 6.2%, the highest on record, reaffirmed the soaring prices narrative.

Today the "transitory" inflation mood is reasserting itself, with Emini futures surging almost 100 points from the overnight lows.

The battered FAAMG sector is solidly in the green as closely watched 5Y breakevens slide and nominals are down to session lows:

Wall Street traders also find comfort in the latest hot take from Morgan Stanley's QDS desk which notes that the the trading desk noted "there was no major panic outside the systematic community as the 'transitory inflation' narrative appeared to be adopted" and furthermore, "the desk continues to see demand in mega cap tech from the longer term community for the third day in a row."

Meanwhile, Bank of America writes that "Both the Fed and the bond market largely dismissed the report as a fluke. Speaking after the release Fed Vice Chair Clarida argued that the rise in inflation would likely prove largely transitory, that it is “one data point,” and that the year-over-year numbers are boosted by base effects. Bond yields barely budged on the news although there was some sell-off in equities over the course of the day. By contrast, we see a worrying pattern in the data. Excluding all of the special factors, including food and energy, leaves us with a “core” measure covering only 70% of overall prices. Moreover, not all of this is one time. As Alex notes, "May could be another big—but not as big—month for core inflation. More broadly, the surge is not just about constrained supplies, but reflects red-hot demand. Very aggressive monetary and fiscal policy has added rocket fuel to the  economic reopening. We are still forecasting 10% GDP growth in 2Q. This has caused an acute shortage of inventories and workers. This explains not only the big jump in core inflation, but the 0.7% surge in wages."

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