Reversals, Inflation, And Scares Of Any Kind

S&P 500 stumbled in its upward run again, but has it been decisively so? VIX has risen, the put/call ratio as well – but that‘s little more than white noise, for nothing has dramatically changed in the markets. We‘re chopping along without advance clues either way – unless you look at inflation expectations and Treasury yields. The Jun 10 CPI reading is ahead:

(…) 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 1970s inflation, and upward price pressures in the job market pressures would kick in.

The much awaited Jun 10 CPI readings would likely come on the hotter side of the spectrum, but would be part and parcel of a continued move to a higher inflation environment where commodities‘ pressures are amplified by job market ones – not that the distortions and disincentives to work wouldn‘t be there.

The Treasury market‘s lull only means that inflation trades have been dialed back somewhat, but haven‘t been broken. As I wrote on May 27, so far it‘s only the precious metals that are relentlessly calling the Fed‘s bluff – by rising almost in a straight line. And when you thought the transitory or permanently elevated inflation debate couldn‘t get any more ridiculous, there comes the Dudley dove talking how transitory could become permanent – it‘s almost as miraculous as being half pregnant.

Seriously, it‘s a testament to the Fed communication‘s success that the transitory story has been swallowed hook, line and sinker to this degree. We‘re getting a temporary reprieve but the cost-push inflation isn‘t going away. At the same time, we‘re in a reflationary period before inflation starts biting noticeably more.

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