Ben Laidler, global markets strategist at the trading and investment platform eToro, analyzes recent price developments and notes that “the risk of a return to inflation is undervalued and increasing.” “A first headline inflation data below 3% is needed in today's January report to validate the benign consensus of a productivity-driven 'impeccable disinflation',” he underlines.
RETURN RISK:
With a surprisingly healthy U.S. labor market and solid economic growth, the risk of a return to inflation is undervalued and rising. It's the most important number in the markets, the biggest investment risk, and our inflation tracker (see below) is now flashing yellow.
Contributing factors to this view are the 10-year bond yield, the Federal Reserve's postponement of rate cuts, and the US dollar being the most profitable currency of the year.
Stocks also welcomed the lower recession risk and firmer earnings outlook, but may be underpricing the risk of an upside inflation surprise.
A first headline inflation data below 3% in today's January report is needed to validate the benign consensus of productivity-driven "impeccable disinflation."
NOWCAST:
The Cleveland Fed NOWCast shows inflation will moderate this month, rising 0.2% mom and 2.9% year-over-year. Driven by falling prices for gasoline, food and used cars, this would be the first 2% increase in this cycle and a figure not seen in 33 months, while underlying prices, excluding energy and food , stand at 3.8%.
The NOWCast also forecasts further easing of inflation next month, with lower price prospects also supported by the Truflation measure at an even lower 1.4%. It is an innovative blockchain-based real-time inflation tracker from over 30 data sources and over 13 million prices.
TRACKER:
The eToro tracker, which monitors 13 leading and concurrent indicators, suggests a divergent story. Prices are stagnating at -40% from 2022 highs instead of falling and +4% in the month of January. Notable improvements in the PMI's predictive employment and price metrics, along with the consolidation of the real estate market and Red Sea-influenced supply chains, have contributed positively.
These gains were only partially offset by the decline in values in the second-hand car market and the moderation of consumer inflation forecasts. eToro tracks labor (employment ISM, JOLTS), housing (Zillow rentals, NAHB index), assets (second-hand cars, manufacturing ISM prices), commodities (gasoline, raw materials general), supply chains (GSCP index, container rates) and expectations (Michigan survey, Break-evens).
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