If there was any question heading into October about what the predominant economic/market theme was, it was clearly affirmed by the end of the month.
Inflation has been a hot topic ever since the global economy began to reopen earlier this year, fueled by pent-up consumer demand and trillions of dollars of fiscal and monetary stimulus. Up until this point, the position of the Fed has been that any rise in consumer prices would mostly likely be transitory and, therefore, not require an immediate policy reaction from the FOMC.
Inflation became the clear and predominant economic theme in October amid stubborn supply chain issues and emerging wage pressures.
Fixed income markets are now pricing a much more aggressive Fed rate hike schedule for 2022-2023, including two 25-basis-point hikes next year.
Bond markets have put global central bank leaders in a difficult position, and future communication by monetary policymakers will be even more closely scrutinized.
The bond market, in general, extended credibility to the Fed’s stance, even as multi-decade high core inflation readings emerged starting in April. Following the initial Treasury curve steepening of the first quarter, Treasury yields traded in a relatively tight range, and market inflation expectations, as measured by TIPS break-even yields, actually subsided beginning in mid-May after the release of the April CPI report.
As the summer rolled on, concerns over growing global supply chain issues moved to the forefront of the news cycle. At the same time, the labor market continued to tighten, fueling wage inflation worries.
September policy meetings by the Fed, European Central Bank (ECB), and Bank of England (BoE) were all generally perceived as more hawkish, which fueled an upward shift in Treasury yields across the curve. This rise in Treasury yields coincided with a repricing of short-term rates in anticipation of the Fed having to act sooner on rate hikes to combat inflation.
This market commentary is provided by ALM First Financial Advisors, LLC, the investment advisor for Trust for Credit Unions. Visit trustcu.com to read about the latest economic data and overall market trends.