Will this week’s inflation data validate rising inflation expectations as measured by the University of Michigan Sentiment Index?
This influential survey indicated long term inflation expectations have increased to the highest level since 2011. Consumers expect prices will climb at an annual rate of 3.2% over the next five to 10 years, up from 3% a month earlier. They see costs rising 4.4% over the next year, compared to last month’s 4.2% pace, according to data released Friday.
The report also indicated expectations for gas prices over the short and long run have increased to the highest this year, at odd with current trend in prices at the pump which have steadily fallen since late September.
Long-term inflationary expectations are a major component of yields for longer dated Treasuries.
Inflation is defined as too much money chasing too few goods fearing higher prices tomorrow. There is a monetary and psychological component.
If inflationary expectations rise or become unanchored, the odds are extremely high long term interest rates will also increase.
Speaking of inflationary expectations, Bloomberg reports corporate managers of the S & P 500 are stating fears surrounding inflation is at the highest level since early 2021. Fears are not centered on product as it was three years ago but on labor.
Inflation is morphing into cost push or wage inflation, the type of inflation that is kryptonite to margins. Bloomberg writes recent union sentiments and the position of the Administration is creating a potentially toxic mix to margins that have remained around record levels.
The correlation between margins and valuations is high. How will this unfold?
Commenting on Friday’s markets, Treasuries were initially posting strong gains, however most of the advance was reversed by late afternoon. Equities—led by the mega sized techs—closed moderately higher.
The economic calendar is comprised of various inflation indices including the CPI, PPI and import/export prices, retail sales, several manufacturing and housing statistics as well as various sentiment indicators.
Last night the foreign markets were up. London was up 0.63%, Paris up 0.35% and Frankfurt up 0.26%. China was up 0.25%, Japan up 0.05% and Hang Seng up 1.30%.
Dow and NASDAQ futures are flat and down 0.3% ahead of tomorrow’s inflation data. There is little reaction to Moody’s downgrading its credit rating of US sovereign debt to negative from stable. The 10-year is up 6/32 to yield 4.63%.
