Forget a ‘taper tantrum’ — ‘inflation indignation’ is here
After Thursday’s bad news that consumer prices in October ran hotter — at over 6%, the hottest they’ve been since the first Bush administration, to be exact — than Wall Street expected, most of the emphasis has been on the reaction in stock markets, where frothy prices pulled back from record highs.
However, as the Morning Brief has pointed out at least a couple of times in the last week, the more interesting reaction has taken place in government bond markets. Since the Federal Reserve announced its plans to taper its massive bond purchases, yields have been unusually calm, showing little if any signs of a tantrum.
Yet the white hot price data clearly upset the bond market’s equipoise. Rates spiked and spilled over into a tepid 30-year bond auction, where bidders drove up government borrowing costs on longer-dated paper by over 10 basis points. It reflected growing investor demands to be compensated at a premium in the face of spiraling prices across a range of sectors.
“I think this inflation is going to be pretty persistent,” Satori Fund founder and portfolio manager Dan Niles told Yahoo Finance Live. “I think we’re going to have a big problem, especially given where valuations are. I expect multiple rate hikes next year from the Fed.”
A market once braced for a “taper tantrum” is now in the throes of what I’d like to call inflation indignation. A convergence of strong pandemic-era demand, skyrocketing energy costs and the worsening supply chain crisis is creating the worst of all possible outcomes.
“The world’s debt levels, asset price valuations and current level of extraordinarily low interest rates, including negative ones overseas, is just not positioned for a bout of high inflation that we are clearly in,” Peter Boockvar, CIO of Bleakley Advisory Group, said.
With growth decelerating sharply from stratospheric pandemic-era levels, “stagflation is the bond market’s message,” the veteran Wall Street watcher warned.
The wags at BlackRock think the dreaded ‘s’ word isn’t warranted, writing in a research note to clients that “while many facile comparisons have been made to other historical periods of elevated inflation (such as the 1970s/early-1980s), and the term ‘stagflation’ has been bandied about quite a bit of late, we do not think the data warrants such worries.”
However, as we’ve noted in these digital pages more than once, stagflation has been a widening worry over the last several months, with Google searches for the term having spiked recently — alongside prices for just about everything (especially food, gas and rent: October’s price data showed tenant costs jumping by nearly half a percentage point).
“It has not just an impact on the consumer, it’ll start to have an impact on how asset prices reflect the change in the inflationary environment,” Vaughan Nelson Investment Management CEO Chris Wallis told Yahoo Finance Live.
“More importantly, we are starting to see it play out in the political realm as well,” he added.
That’s at least partly why President Joe Biden, sensing the dual political peril of ships marooned in the Pacific and spiking prices, vowed to make inflation his administration’s top priority.
He may want to move quickly, because the more inflation shoots, the grumpier the general public — already in a foul mood — is expected to get. Voter unease with the pandemic-era economy was at least partly a motivating factor behind the political earthquake of Virginia’s gubernatorial race, and the near-political death experience of New Jersey Democratic governor Phil Murphy, in what should have been a cakewalk reelection.
Moreover, political betting markets, which have become a more reliable barometer than public polling, are starting to trend in the wrong direction for Biden and his party. After the Virginia and NJ elections, US-Bookies.com shows Republican odds to win majority control of both chambers of Congress are rising sharply.
“With a string of poor approval ratings for the Biden administration, the Republicans’ odds improved to the point that bookies favored them to win control of Congress,” US-Bookies said. “And with Donald Trump being the favorite to win in 2024, the odds are now predicting a clean sweep for the GOP.”