Are Central Banks on an end year pause with rates hikes as they bounce around with Dovish and Hawkish rhetoric? Inflation could become hyperinflation in 2023 with Central Bank's lack of guidance to the market. The Fed's terminal rate should be at 9%
Markets are rallying into mid-term elections, which unfortunately means the Federal Reserve Bank that has been unreliably tardy with its rate expectations any more or less offering very little guidance to the market, expect for its Hawkish and Dovish and Dovish, Hawkish on again and off again rhetoric. Could be politically motivated to ease off the rate hikes. The above chart says it all, with the worst inflation in over four decades, the white line represents U.S. core inflation highest since 1974, the yellow line is U.S. import prices at highest in history, which is indicative of supply chain shortages which are still evident and the passing onto to the consumer re: higher energy costs, which is predominantly from sticky oil and gas prices. The various call out tags (on chart) show the 1970's oil shock, inflation and rates, through to the 1980's oil glut and how inflation declined rapidly after the late Fed Chief Paul Volcker slammed rates in 1981 up to 19%. Is the Dovish/Hawkish current chairman Jerome Powell able to lift rates to at least a terminal point of 9%?
Chart 2 shows oil price and its correlation with the 10 YR Breakeven Inflation rate, now moving closer to its August 2022 highs of 2.60% in line with the oil price which was $95 (8/2022). The price of oil is is at $90 with the 10 YR Breakeven Inflation at 2.50%. Inflation is certainly not peaking out. The current market rallies are in light of Powell unable to give a clear direction of the Fed's terminal rate and therefore the market, in its confusion, are gauging that the Fed will begin to offer small rate rises and god forbid, pivots in 2023.
Inflation is becoming so imbedded into the global economy, a precursor to hyper-inflation may not be far away. Watch your weekly supermarket bills.
Crazy days.
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