Core CPI came in at 2.2% today. Back in 2016, this was cause for concern, but now bond markets trade like inflation isn’t even a remote concern. What’s up with this? If 2% is the Fed’s target and we’re at 2.2% currently, isn’t that bad for bonds?
We discussed this in greater detail in the Day Ahead (refresh your memory, if you like), which essentially argued that inflation doesn’t really matter anymore. That’s a notion I’d been shouting from the rooftops for 6 or 7 years until inflation abruptly seemed to matter again in 2016. Since today was a slow-ish market day, I thought I’d give you the inflation backstory instead of forcing meaningless analysis on a sideways market that’s waiting for economic data, an end to the shutdown, or an indication of the next big break in the stock market (not that I’d ever force meaningless analysis!).
Here’s that chart one more time so we can follow along in the next few paragraphs:
The big drop in inflation in 2010 combined with the unprecedented quantitative easing policies from the Fed caused a resurgence of fear about “hyperinflation.” Market participants who were of working age in the 70’s and 80’s were especially concerned, but that concern has since proved unfounded (despite being understandable in light of the chart).
Over the next 6 years or so, there was effectively zero concern for inflation, because markets were more concerned with whether or not the economy could be stabilized without ongoing spurts of bond buying from the Fed. By 2016, the Fed had just begun hiking rates and made it 2 whole years without a new bond buying program. Rather than sink back into oblivion, inflation actually began picking up.
Early 2016 thus marked the first opportunity in years for markets to worry about inflation again. Reports like today’s Consumer Price Index were intently watched and had much bigger impacts on bonds. Then in early 2017, inflation dropped off again, with analysts blaming changes in cell phone plan costs (as silly as that may sound).
Given that most of the recent Fed communication has firmly downplayed near-term and long-term inflation risk. The topic is once again falling by the wayside. If it’s going to be a market mover again, it will take a pretty big shift–not only in the data, but also in the rhetoric surrounding it.
Rather than give inflation data any credit for market movement today, we can safely say bonds (and stocks, for that matter) were and are committed to the sideways grind that was resoundingly confirmed with today’s movement. It will take some sort of traction on the government shutdown, or some inspiration for stocks in order for bonds to be coaxed out of this range.