The Fed meeting yesterday shed a bit of light on the current monetary situation with inflation rising. We are somewhat concerned that inflation and inflation expectations are running above the Fed’s long-term target of 2%, but we have not hit maximum employment yet. We think the Fed should not be overly concerned with a low-2s inflation expectation-reading for a quarter or two.
However, if inflation persists or moves higher, the Fed will need to react. The Fed is assuming inflationary pressures are largely transitory and that long-term inflation expectations will be well-anchored around 2%. So, the Treasury market needs to prepare for higher short-term rates, but ultimately the Fed will not let inflation get out of control, which could temper any rise in longer-term yields.
The data points this week hardly seem to support strengthening inflationary conditions. In fact, look at some of the commodities below:
– Lumber rolling over
– Copper might be rolling over
– Producer Price Index ex-food ex-Energy at +0.7% vs 0.5%
So, from the market’s perspective, the FOMC is not on its heels if it continues to suggest “transitory” inflation. In any case, I do not have a strong view on market direction this week.
Also, this week:
– single stock option expiration
– single stock futures expirations
– index option expiration
– index futures expiration
This happens four times per year and will cause some unusual trading this week.