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Thursday, November 11, 2021

Forget a 'taper tantrum' — 'inflation indignation' is here

After Thursday’s bad news that consumer prices in October ran hotter — at over 6%, the hottest they’ve been since the first Bush administration, to be exact — than Wall Street expected, most of the emphasis has been on the reaction in stock markets, where frothy prices pulled back from record highs.

However, as the Morning Brief has pointed out at least a couple of times in the last week, the more interesting reaction has taken place in government bond markets. Since the Federal Reserve announced its plans to taper its massive bond purchases, yields have been unusually calm, showing little if any signs of a tantrum.

Yet the white hot price data clearly upset the bond market’s equipoise. Rates spiked and spilled over into a tepid 30-year bond auction, where bidders drove up government borrowing costs on longer-dated paper by over 10 basis points. It reflected growing investor demands to be compensated at a premium in the face of spiraling prices across a range of sectors.

“I think this inflation is going to be pretty persistent,” Satori Fund founder and portfolio manager Dan Niles told Yahoo Finance Live. “I think we’re going to have a big problem, especially given where valuations are. I expect multiple rate hikes next year from the Fed.”

A market once braced for a "taper tantrum" is now in the throes of what I’d like to call inflation indignation. A convergence of strong pandemic-era demand, skyrocketing energy costs and the worsening supply chain crisis is creating the worst of all possible outcomes.

“The world’s debt levels, asset price valuations and current level of extraordinarily low interest rates, including negative ones overseas, is just not positioned for a bout of high inflation that we are clearly in,” Peter Boockvar, CIO of Bleakley Advisory Group, said.

With growth decelerating sharply from stratospheric pandemic-era levels, “stagflation is the bond market’s message,” the veteran Wall Street watcher warned.

The wags at BlackRock think the dreaded ‘s’ word isn’t warranted, writing in a research note to clients that “while many facile comparisons have been made to other historical periods of elevated inflation (such as the 1970s/early-1980s), and the term ‘stagflation’ has been bandied about quite a bit of late, we do not think the data warrants such worries.”