Why inflation worries are starting to show up in this part of the market again
Growing concerns about a return of price pressures sent rates on swaps used to manage inflation risk to the highest levels in more than two months on Wednesday.
One- through 30-year rates on CPI swaps, or contracts linked to the Consumer Price Index, inched further above 2% to their highest levels since either mid- or late July, based on Tradeweb data as of 3 p.m. Eastern time. Meanwhile, five- and 10-year breakeven inflation rates also crept higher this week and headed in the same general direction they’ve been in since the Federal Reserve delivered an aggressive rate cut on Sept. 18, based on the most recent data from the St. Louis Fed.
Photo: Five- and 10-year breakeven inflation rates — along with the five-year, five-year forward inflation rate — are back on the rise again. Source: Federal Reserve Bank of St. Louis
Two weeks ago, the Fed’s 50-basis-point rate cut triggered worries that inflation might not be so easily defeated. Now, traders are grappling with a multitude of potentially inflationary forces: a dockworkers’ strike at U.S. East Coast and Gulf Coast ports, rising oil prices amid a possibly widening Middle East conflict, and stimulative measures by China’s government and central banks in the U.S. and Europe that are cutting interest rates.
See also: U.S. ports strike could create disruption, but opportunity for these distribution companies and Hong Kong stocks surge to 20-month high as China-stimulus rally continues apace
“CPI swaps can be used as insurance by investors who are worried about inflation, but can also be used by others who want to benefit from rising inflation,’’ said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.
“It’s hard to say whether what’s happening is speculation that inflation has bottomed and the Fed is easing as the economy begins to reaccelerate, or if people just want to be protected in case inflation does rise,” Chandler told MarketWatch Wednesday. “One is a form of active participation by those who say inflation has bottomed, and the other has to do with businesses which think they may get hurt by inflation and need an insurance policy.”
Higher oil prices, a dockworkers’ strike, and stimulus around the world tend to support prices, he added. “But they have to be sustained for a while in order to have much impact. If tomorrow, dockworkers go back to work or the Middle East conflict gets resolved, this will be a little hiccup. The longer it’s sustained, however, the more price pressures will build.’’