Bloomberg VIEW: Inflation and CHINA to rattle markets in 2022 (El-Erian)
"Investors were relatively unfazed by the year’s two big economic surprises. But the effects of rising prices and Beijing’s corporate clampdown could play out in unexpected ways next year."
Normally this time of the day I’ve been passing along what - if anything - happened overnight, ‘while you slept’.
It is said that turnover was quite good (160% of the average with most of that being in 7s (275%) and 2s (230%).
MNIs morning brief arrived with a title of,
Bonds Bouncing, But Recovery Shallow
Executive Summary:
Biden - Putin call expected to directly address Ukraine tensions
USD bouncing, reversing decent part of Wednesday losses
Bonds bouncing, but recovery shallow
Generic Bund futures turning lower into year-end
AND it went on to detail NYE TRADING SKED and some bond market stuff
NYE Holiday Trading Schedules
Dec 31st:
NYSE open as usual
CME Floor Trade: Interest Rate Floor Options Closes at 1200CT/1800GMT
Intercontinental Exchange observes US Holiday
Eurex is closed for trading in all derivatives. No cash payment in JPY.
January 3rd:
NYSE open as usual
CME operates normal trading hours, but Chicago trading floor is closed
Intercontinental Exchange observes UK Holiday
Eurex closed for trading and clearing in Exchange Traded Commodities as well as British equity and equity index derivatives, Irish equity derivatives, Russian equity derivatives.
BOND SUMMARY: Bonds Bouncing, But Recovery Shallow
Bond futures across the continent as well as the US are slightly higher Thursday, recouping a small part of the losses suffered yesterday. Mar-22 Treasury futures are higher by just over 6 ticks, trading at broadly the midpoint of the Wednesday range.
Improving equity prices are also being reflected in Italian bond markets, with BTP futures over 70 ticks off the weekly lows. This has pressured the Italian 10y yield back to 1.10%, dropping near 5bps on the session.
Yield curves are generally trading flatter, with the longer-end outperforming across both German and US curves. News and macro catalysts are few and far between, keeping focus on end-of-year trading and the upcoming call between Presidents Biden and Putin.
Data of note Thursday includes MNI Chicago PMI, with markets expecting the data to improve marginally to 62.0 from 61.8 previously. Weekly jobless claims also cross, with consensus looking for a 206k IJC - in line with the prior reading.
With that little in mind, I thought it would be appropriate to share a (Bloomberg)VIEW from Mohamed A. El-Erian which dropped at 3a
Inflation and China Failed to Rattle Markets. 2022 Might Be Different.
Investors were relatively unfazed by the year’s two big economic surprises. But the effects of rising prices and Beijing’s corporate clampdown could play out in unexpected ways next year.
They say that all opinions are created equally — in theory. In practice we know how some opinions are simply thought to be more equal than others. HE details the inflation surprise,
I know of no forecaster who came close to projecting a nearly 7% U.S. inflation rate for the end of this year, and that includes those of us who pushed back as early as six months ago against the notion that this bout of inflation would prove to be transitory during 2021.
Today, unusually high and persistent inflation has become the consensus call. Yet even now, there is an under-appreciation of the current inflation dynamics, including supply-chain disruptions and worker shortages associated with the new Covid variant, omicron.
The surge in inflation is even more striking given that, unlike what textbooks and prior experience would suggest, its impact on markets has been muted.
Yields on government bonds, for example, have been relatively subdued, with 10-year U.S. Treasury notes still trading around 1.50%. Indeed, if anything, yields adjusted for inflation have fallen deeper into negative territory. Meanwhile, stocks have gone from one record high to another, reaching a total of 70 for the S&P 500 Index this year.
This makes the new year an uncertain proposition for the economy, for markets and for public policy.
Will inflation derail economic growth while also worsening inequality? How long will it take for the Federal Reserve to catch up to inflation realities, and which policy measures will it deploy?
How quickly will a tightening of market financial conditions follow the pivot to fewer stimulus policies from central banks? How big will the economic and financial impact be, in the U.S. and across the world?
Will yields rise as bond investors look to limit the erosion in the real value of their investment? If so, how will stocks react?
Which countries and sectors are particularly sensitive to higher market volatility?
What makes this even more interesting is that it comes with significant political and institutional stakes. From the ability of Democrats to retain control of Congress to the damaged credibility of the Federal Reserve, the 2021 inflation surprise will reverberate throughout 2022 …
… The evolution of inflation and China’s investability constituted big surprises in 2021, as did their lack of spillover into other areas. It remains to be seen how benign last year’s surprises will stay for the global economy and markets.
So in his view, there are apparently more questions than he’s willing to provide answers to, at this point.
Word salad, then, for you and me.
Personally and in my (now even LESS important, non professional)VIEW, INFLATION SURPRISE will simply be whatever is the price of oil. Furthermore, depending upon POLICY towards the oil patch domestically and the USA stature in the world and on the geopolitical stage.
Said another way, I can easily see MATH (ie BASE EFFECTS) kicking in and weighing DOWN INFLATION next year (ie transitory after all) and on the other hand, administration trying to ‘fix’ things globally actually making matters worse here at home.
A flaw or a feature of policy? THAT is a question far above my paygrade and this is NOT a political blog but debate the future of inflation and whether or not it will be a surprise if you’d like.
RENTS. Wage-push-inflation. I completely understand it but it’s much less academic than the experts would like to make it out to be. I’ll quit while I’m behind, still debating internally WHAT the future of inflation and expectations holds along with long road trips and daily commutes. Consider this monthly visual, Mohammed, and I’m looking forward to more answers than questions next time
More (or less) later on …