- US inflation jumped 7.5% in January from a year earlier, the highest since 1982.
- The jump beat Wall Street forecasts and investors are now bracing for a much faster rise in US rates.
- We list comments from some of the largest investment banks and asset managers on the rate outlook.
Inflation is ahead of everyone, including the
expected this year.
Thursday’s data showed the consumer price index (CPI), which measures the price of everyday goods and services, rose 7.5% in January, the highest rate since 1982 and higher than economists’ expectations for a 7.3% increase.
Soaring costs for energy, food, housing and medical care, among other factors, add to existing pressure from labor shortages, supply disruptions and high request following the Covid-19 pandemic.
The core CPI, which excludes volatile food and energy categories and is the Fed’s preferred way to measure inflation, climbed 6% in January from a year earlier, also the highest since 1982 and higher than forecast by 5.9%.
Investors quickly sold riskier assets like stocks and cryptocurrencies and dumped short-term bonds, pushing the yield on the two-year Treasury bill to the highest in a day since mid-2009.
The jump in inflation beat all market expectations and weighed on markets, with the S&P 500, Dow Jones and Nasdaq opening lower on the news. 10-year US Treasury yields hit 2% for the first time since 2019 while the dollar fell 0.15%.
The larger-than-expected push added more pressure on the Federal Reserve to raise interest rates and contain inflation and consumer demand. It has also prompted investors to reassess how quickly the central bank is likely to raise interest rates.
Based on the CME Group’s FedWatch tool, investors expect a 70% chance of a 50 basis point hike at the Fed’s next meeting in March. That’s up from around 34% a week ago.
Some of the world
and asset managers weighed in on how Thursday’s data changed the outlook for US rates. We list their comments below:
Jay Hatzius, Chief Economist
“Following this morning’s strong CPI print, we are raising our Fed forecast to include seven consecutive 25 basis point rate hikes at each of the remaining FOMC meetings in 2022 (up from five hikes in 2022 previously) We continue to expect the FOMC to rise three more times at a gradual pace of once per quarter in Q1-Q3 2023 and reach the same terminal rate of 2.5-2.75%, but sooner. We see the case for a 50 basis point rate hike in March The funds rate level seems inappropriate, and the combination of very high inflation, strong wage growth and strong short-term inflation expectations means that fears of falling into a wage-price spiral are worth taking seriously.”
“So far, however, most Fed officials who have commented have been opposed to a 50 basis point hike in March. So we think the most likely path is instead a longer series of hikes 25 basis points from the basis point.” Bullard became the first FOMC participant to call for a 50 basis point hike earlier in the day, and we would consider revising our guidance if other participants join in, especially if the market continues to assess high ratings for a 50 basis point move in March. “
JPMorgan Asset Management
Jai Malhi, Global Market Strategist
“U.S. inflation has consistently exceeded expectations and today’s inflation release saw the same. This presents a significant challenge for the Fed as it aims to keep rising prices below control while supporting economic expansion.”
“High energy prices and supply issues are fueling inflation, but these issues should eventually fade. More concerning is that wage pressures are building and the The central bank won’t want to risk spiraling wage prices.However, going forward, real consumer spending on discretionary goods and services is likely to cool naturally, as higher energy costs begin to bite. »
“The bond market is currently suggesting that there is a good chance that the Fed will raise rates more than five times by the end of the year. While today’s release will be uncomfortable for the Fed, the Compression of real earnings suggests that perhaps it can afford to be a little more patient than the market thinks.”
HSBC Private Banking and Wealth Management
Willem Sels, Global Chief Investment Officer
“The consumer price index was expected to rise again in January, but it jumped even more than expected, so the inflation debate is going to rage on for now. What markets really want to know is is when US inflation will peak, but this upside surprise again illustrates how difficult it is to accurately forecast inflation.”
“The inflation debate is not settled, and we advocate three strategies in portfolios to deal with high inflation. First, we look for ‘quality’ stocks, companies with strong positions in market that allow them to charge higher input costs to their customers, so they can protect their margins.”
“Second, tech stocks may be vulnerable to higher rates, and so we balance them with value-style stocks such as banks and energy stocks. And third, we believe investors should expect continued
in the markets until it is clear that inflation is coming down, and we manage this through disciplined portfolio diversification.”
Tiffany Wilding, North American economist
“As far as monetary policy is concerned, this impression surely increases the likelihood of the Federal Reserve raising rates by 50 basis points in March, and market prices have consistently moved to a 50% probability. However, we still think that the Fed would rather increase sequentially at each meeting, rather than a more abrupt adjustment.
Additionally, if the credit card data we use to forecast retail sales proves to be accurate, the combination of CPI and retail sales impressions suggests that the ability to pass on further price adjustments could to diminish. Nevertheless, this publication will surely concern the Fed and make it difficult for it to push back market prices. At a minimum, today’s data reinforces our expectation that the Fed will likely begin raising rates at a rate of once per meeting.”
Chief Strategist Jim Reid
“Indeed, the 7.5% year-over-year figure (vs. 7.2% expected) raised even the remote possibility of the Fed’s first rate hike between meetings since 1994, and before that since 1979. It also increases the risk that a
could be increasingly difficult to avoid.
“Our US economists yesterday increased their call for the US Fed to hike 50 basis points in March plus five more 25 basis point hikes in 2022, a hike at all but the November meeting, and totaling 175 basis points. base in 2022. They also highlight the growing risk of a recession in 2023 or 2024.”
“Clearly forward guidance is a useful tool in times of uncertainty, but around regime change it can be a nightmare. For several months we had to wait patiently until March to start fighting inflation whereas in previous eras when every meeting would have been live, rates would likely have been raised many meetings ago.”