US inflation advanced to 6.2% in October. That’s the highest level since more than three decades, and it is relatively high compared to the 0% that the Federal Reserve (Fed) is using as the benchmark interest rate.
More worryingly, it looks less and less transitory, because the rise is mostly due to the rise in cars prices, but also the rise in food prices (where you can argue it’s volatile), the rise in energy prices (which could be temporary indeed, but the fact is that we have a growing energy crisis going on across the globe right now), and most worryingly, due to the rise in rents.
Higher rents and higher wages are factors that will make the rise in inflation stick around for longer, and at this point, we are really moving significantly away from the Fed’s 2% average inflation target. The only thing we have is a Fed President twiddling his thumbs, insisting that inflation is transitory. And the alternative to Powell as the next Fed Chair is Madame Brainard who is seen as being even more dovish!
Still, the market reacts to overheating inflation figure. The US 2-year yield jumped 9 basis points yesterday, back above the 0.50% mark, shrugging off the dovish comments from the last FOMC meeting. But we are still very, very much low for an economy that is dealing with the highest inflation levels since 1990. Therefore, the yields have potential for a meaningful rise, and the US dollar should extend gains whatever is said, because – and I can’t believe I am making the same comment that I make for the Turkish lira – the longer they wait to readjust the rates to the upside, the bigger the size of the move would be.
At this point, even if inflation is transitory, it is unacceptably high for justifying the unresponsive Fed. Higher rates wouldn’t solve the problem of chip shortages or the bottlenecks, or other pandemic related factors, but it could slowdown demand and narrow the gap.
The EURUSD tanked below the 1.15 mark for the first time in a year, Cable is back to the 1.34, and the outlook is bearish for both due the prospects of stronger US dollar.
The jump in US inflation, and the yields soured the mood in the equity markets. Nasdaq of course paid the highest price among the three major US indices. The tech-heavy index lost 1.66% as it is plenty of the so-called growth companies who need the rates to stay as low as possible to grow faster. The Dow Jones eased 0.66% and the S&P500 retreated 0.82%. But overall, compared to the inflation shock, it’s not a dramatic decline. And activity in US equity futures was positive in Asia, Nasdaq futures are up 0.22% at time of writing, hinting that the moodiness in the market will likely be transitory, unlike inflation…
Goldman advises to buy the USD 5-year 5-year breakevens on a bet that inflation would accelerate, and that the Fed would do nothing dramatic to tame the inflationary pressures, but people actually prefer rushing to Bitcoin, as a new-age inflation hedge. As such, Bitcoin hit a fresh record yesterday, before easing.
I am not saying that Bitcoin is not a good inflation hedge, I am saying that we don’t have enough data in hand that proves that it is. This is the first time we see inflation rising since the inception of Bitcoin, and Bitcoin was rising as fast during the times of 0 inflation, as well. To me, the only thing that would make Bitcoin a good hedge against inflation is the benefit of doubt. The fact that it is rising along with inflation, and that it is a rare asset, and that there will be only 21 million are arguments that are not strong enough to give Bitcoin the statute of the King of the Inflation Hedging Tools. Bitcoin is not, in anyway, fundamentally tied to the monetary policy or the economic fundamentals that would make it a fundamentally strong hedge against rising consumer prices. What makes Bitcoin a good inflation hedge is people thinking that it is a good inflation hedge. It works well, but it is vulnerable.
Good old gold is finally giving sign of life despite the jump in yields. The price of an ounce advanced past the $1850 mark, and the positive breakout could finally lead to a sustainable rise, and the skyrocketing inflation could finally justify a rally back to the all-time high levels for the precious metal.
