Week of October 10, 2022
Dec Mullarkey, CFA , Managing Director, Investment Strategy and Asset Allocation
It often seems like markets can only focus on one big theme at a time, with everything else becoming a sideshow. However, it would be hard to quibble with their current selection. Inflation is a scourge and every data point related to it – and every utterance from the U.S. Federal Reserve on how the central bank plans to tame it – are forensically analyzed.
This week brought a helping of both. The U.S. Producer Price Index (PPI), which tracks what manufacturers pay for goods and services, dipped year over year in September but accelerated over the month. This suggests inflation is in no hurry to cool. This was confirmed later in the week as the Consumer Price Index (CPI), which tallies price increases for the average person, telegraphed the same. Inflation remains broadly unshackled even as the Fed tightens at its fastest pace since the 1980s.
The Fed also released minutes from its September meeting, which can provide a close-up and sometimes more nuanced view of the Fed’s intent. The minutes showed no subtlety. The Fed governors felt they could cause more harm from underreacting to inflation than overreacting. All this bolsters the odds that the Fed will hike rates another 75 basis points when it meets in November.
Source: Bloomberg, 2022.
Brett Pacific, CFA , Senior Managing Director, Head of Derivative & Quantitative Strategies
The U.K. bond market continues to feel the impact of collateral calls from U.K. pension funds. Funds that use derivatives as part of their liability-driven investing strategy continue to sell assets to raise cash to meet margin requirements on their swap books. J.P. Morgan has estimated between ￡125B–150B of margin calls since late summer. This forced liquidation of gilts and linker bonds raises doubts as to whether the Bank of England can end its effort to support the U.K. government market with bond purchases on Friday. This market disruption highlights the challenges faced by central banks in implementing (and sticking with) quantitative tightening.?
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