Powell needs more Inflation at what cost?

Powell needs and wants more inflation, but will it be at the cost that bond traders send yields hiher than he can handle? Just as market-based inflation figures pushed to 7 year highs and yields extended the gains, the latest CPI report came in under expectations at 1.4% y/y. Powell should start speaking now and he will likely say something along the lines of "Inflation is moving in the right direction but has a lot more to do" Inflation is suddenly on the tip of every market-watcher's tongue as more US fiscal spending collides with the reopening and the Fed's pledge to keep rates at zero for years. Interestingly, USD fell and metals rose on the lower than expected CPI figures.  Chinese CPI on Wednesday was soft but US January prices could tell a different story. Meanwhile, here's Ashraf's latest on Ethereum's rally vs gold & the rest. 

Brent cruised through $60 this week to $61 in a quick return to pre-pandemic prices that will make the March OPEC+ meeting very interesting. The jump in oil pales in comparison to many other commodities that are trading at or near long-term highs. Couple that with ongoing shortages in industrial equipment including computer chips and all signs point to prices going up.

US 10-year breakevens are already at the highest since 2014.

What really has the market's attention is the year-over-year comps that will run from March through June, a time when oil another other prices were extremely depressed. That will very likely lead to a period of above-target inflation. Central banks know this and have pledged to look through it, but in the spirit of Mike Tyson's famous like “everyone has a plan until they punched in the face with rising inflation.” And don't forget that housing markets are extremely tight in much of the world.

We have no doubt that inflation will be the dominant market story in the year(s) ahead and how central banks deal with that; especially if governments continue to spend coming out of the pandemic. At the same time, the risk-positive backdrop will remain until there is a tap on the monetary or fiscal breaks.

One comforting number on Wednesday came from China where prices were down 0.3% y/y compared to a flat reading expected. Even with the economy affected less by the pandemic, inflation isn't a problem.