Inflation Easing, Now What?

The S&P 500 refused to keep early gains, and reversed back into no man‘s land – on little convincing volume. For now, we remain chopping below the 4,180 level, which, if conquered on a closing basis, would prove to be a bullish achievement. Until that happens on convincing internals, false moves in either direction may remain.

The Fed telegraphing the talk about tapering is a first step in preparing the markets to not get surprised by the actual deed, but how far of a step is that one, really? Stocks, bonds, and currencies aren't reacting much – it‘s only commodities that are in consolidation mode, but this can be chalked down to inflation expectations calming down over the prior three trading days.

Until the Fed truly moves or makes its forward guidance as unequivocal as can be in this respect, the markets may continue displaying a doubting attitude (or at a minimum, a wait-and-see one):

"The market simply isn't convinced the Fed is serious about taking on inflation through (gradual) removal of the punch bowl – or about shaping its forward guidance credibly this way (yet). Inflation expectations are cooling down a little, and the Treasury market is tracking them closely.

"But this doesn't mean that bonds are taking the central bank seriously – this move is part and parcel of the transitory vs. getting (practically permanently unless a Fed game changer arrives – still unlikely) elevated inflation readings debate.

"While I think that the red hot CPI inflation would die down a little (i.e. not keep rising ever as steeply as was the case with Wednesday‘s data) once the year-on year-base to compare it against normalizes, a permanently elevated plateau of high and rising inflation would be a reality for more than foreseeable future simply because the Fed would be as behind as Arthur Burns was in fighting the 1970's inflation, and upward price pressures in the job market pressures would kick in."

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