The bond market is kicking and screaming again.
US 2-year yields are up 19 basis points to 4.73% as the market digests a hut CPI report and comments from Chris Waller. The Fed Governor said that a 50 basis points hike was on the table for December if core CPI ran at +0.3% or higher. Well it was at 0.3% and if not for a 1.2% drop in monthly used auto prices, then it would have been +0.4%. Waller also highlighted the widening breadth of price increases and that was evident in the report.
This month, the market had grown less worried about inflation because oil prices have fallen but the Fed thinking is that inflationary expectations are starting to get built into 2027 price setting. That’s something I highlighted in late October, as Whirlpool said it would hike price 7% starting December 3.
The Fed was wrong when it said that tariff effects would move through the economy quickly and now we’re seeing that. Companies like Whirlpool saw margins collapse and tried to avoid price hikes. Consumers had also benchmarked on lower prices and some income segments are certainly struggling but eventually vendors realize they have to hike prices as the costs of things like steel and other inputs move through the supply chain.
I think the Fed is getting that rude awakening right now. Oil prices have obviously come down but product cracks are stiill absurdly wide so that limits the downside for now. I can’t see that materially improving unless we get peace in the Middle East and Ukraine. There have been some positive steps recently but there’s no sign a concluded deal on either front is imminent, so I’d argue that risks are towards sentiment worsening.
Here is what Marco Rubio, the US Secretary of State, said today:
At the moment, the talks have not been particularly productive because the Iranian demands are simply unacceptable, and in some cases they are outrageous, ridiculous, and detached from reality… We’re not going to pay. Iran, you know, is demanding reparations. They should be the ones paying reparations because they’re the ones that have, you know, destabilized the region for long periods of time. They’re demanding pallets of cash, which the president made clear is not going to happen.
If they want a nuclear energy program, they should have one, like many other countries around the world have. So there’s things they can do, but just right now they just don’t seem, you know, at that point. Now I think they want a deal. There’s no doubt they’d like a deal too, but they’re just not ready to make one apparently. But we’re open to a little bit changes. But I don’t think status quo is the right way to phrase this. Status quo means that things are going to stay static. They’re not. They’re going to continue to grow. What I’m saying to you is that the economic campaign is so devastating that right now there really is no need for major combat operations. The president has basically said that over the last few days, and that’s what I told our European allies today.
That doesn’t sound great.
So as the election dust settles, it’s starting to look like nothing will change and that’s problematic and inflationary. I would also argue that at some point you will have to price in a Democratic sweep in 2028 and all the fiscal largess that will come with it, if Republicans don’t force some kind of strategy change on Iran or tariffs.
This article was written by Adam Button at investinglive.com.