The inflation scare is over.
That's the message from the bond market and -- increasingly -- from the economic data. Yesterday's CPI numbers undershot expectations and inflation has clearly topped, with prices down to 5% from a high of 9.1% in June.
Today, we got PPI data and it's the same story with the y/y number down to 2.7% and the last 9 months of m/m readings close to zero.
There is some housekeeping to do as lagged housing inflation works its way through and workers are still getting wage hikes but the Fed has restored its credibility and will hike in May and keep rates there through year end if the economy holds up. If the economy slumps, the Fed will cut but a recession is even more disinflationary.
The main risk to markets right now is that the Fed stays too stubborn for too long and plunges the US economy into an unnecessary recession. In any case, they will keep rates too high for too long in fear of heating up the economy. As usual, the Fed will try to fight the last war and it will result in less-than-ideal growth for years.
For me though, the trade is to look beyond that and a reversion back to the same kind of low-inflation world we had in the 2010s. The pendulum is swinging towards less government spending and generative AI is going to dramatically loosen the jobs market, perhaps permanently with the only question as to when it happens.
In the bond market, what had looked like a flight to safety on a bank crisis is really the realization that the low inflation world has returned.
US 10s failed to break the October highers and set a lower high before making a lower low. A return to a 2-handle is inevitable and the brief window to get meaningful returns in fixed income is closing.
For FX, it's a sanguine outlook that will now depend on who cuts first. Gold is cheering the latest inflation data and is on a collision course to test the major levels at $2073.
