The US interest rate hike thesis rests on chicken legs?

| Amir Kahanovitz, Chief Economist, Phoenix-Excellence |

Data released on Friday, surprised with a monthly increase of 0.8% compared to expected a more moderate increase of 0.7%. At an annual change, inflation nevertheless met expectations of 6.8%, due to a single-digit round after the point.

And yet, paradoxically, bond yields have declined, especially those that stood out. The market is still expecting the first time in the US in June, but at a slower pace than estimated until the publication of the “low” inflation figure.

The dissonance between high inflation and declining yields was explained by the fact that behind the scenes, investment managers expected an upward surprise. This is a clever explanation, but even if we assume that it is true and the “real” expectation was for annual inflation of, exaggerated, 7.4%, then what is the difference in terms of the Federal Reserve? Both are far, far beyond his goal. Is it possible for such a minor difference that any thesis of raising interest rates could collapse? Is she leaning on chicken legs? Are the “real” expectations of inflation so high that the balance of prospects is now downward?

Long-term yields in the U.S. also responded to the decline in inflation, but due to the effect of declining short-term yields, with the 5-year forward yield remaining almost unchanged for 5 years. 2-10 stood at 83 basis points on Friday, and according to Bloomberg calculations, according to the forward curves that will be in June, the time when the Fed is expected to start raising interest rates, the slope has already dropped to 55 basis points.

Raising interest rates at such a low incline, if they do materialize, will make this cycle of interest rate hikes the tightest in this generation. That is, the market expects interest rate hikes to be very limited and may even cause the transition to depreciation very quickly. Further evidence of the fragility of the interest rate hike thesis we have recently received is also recalled from the outbreak of the Omicron variant, which is currently raging in the UK and burying the chances that there were high rises this month.

And now data from consumer surveys from Israel show how it has affected us as well: The Central Bureau of Statistics’ consumer confidence index, published on Sunday, fell sharply into negative territory in November, to minus 13%, compared with minus 8% in October. The aggravation was recorded in two of its four items: the expected change in the economic situation in the country in the coming year fell to 13% – a value of 1% – in October, and the expected change in the economic situation in the coming year fell to a negative value of 1% – a positive value of 9% in October . The fragility and speed with which the variants come and go casts doubt on any attempt to predict the timing of an interest rate hike.

Eastern markets are showing optimism on Monday morning, this time amid signals from Chinese decision-makers that policies may be more supportive. Bloomberg reports that expectations have risen that China will launch fiscal incentives in early 2022. Indeed, commodity prices are rising this morning, along with stock market futures, but who is not responding? The bond market, which keeps yields low, is booming.

| Inflation in the US – the housing section on the spotlight

Most of the increase in annual inflation in the US came from four major sections: energy, vehicles, food and housing, with four accounting for 81% of annual inflation. While energy, food and vehicles are considered “temporary” due to temporary disruptions leading to their rise Annual of 3.9%, has become the main argument that inflation is here to stay, but it is possible that what we are seeing now are the price increases of a few months ago.

The method by which the housing clause is measured takes into account the entire rental market, and not just the most recent transactions, so it takes time for “old” rental contracts to be updated so that rental prices reach the consumer price index with a long delay.

Indications from the US rental market show that the wave of price increases is fading: ApartmentList.com, an apartment rental platform, publishes a monthly price report based on millions of advertised transactions, in which it describes that in the last four months there has been a sharp slowdown in rental rates. Although it is a seasonally negative month for rent, but also seasonally adjusted, it is a significantly slower pace than in previous months. Starting in the second half of 2022.

The writer is the Chief Economist of Phoenix-Excellence. This review is provided as a service to readers only, and should not be construed as an offer, recommendation, substitute for the reader’s professional judgment or investment advice or investment marketing, purchase and / or sale and / or holding of the securities and / or financial assets mentioned or of securities and / Or any other financial assets.