Market Extra: Financial markets ran with ‘peak inflation’ narrative again. Here’s why it’s complicated.

by | Nov 15, 2022 | Stock Market

Financial markets grabbed hold of Tuesday’s U.S. softer-than-expected producer-price report and ran with it, driven by the underlying narrative that inflation may have hit its peak and is only set to ease further from here.Investors and traders can hardly be blamed for cheering Tuesday’s developments considering the euphoria that accompanied last Thursday’s smaller-than-anticipated gains in the consumer-price index, which sent the Dow Jones Industrial Average up by 1,201.43 points in a single day. After Tuesday’s PPI report, stocks initially bounced back from Monday’s lower finish, though Dow industrials relinquished gains in the afternoon. Yield-starved investors jumped into Treasurys again and the ICE U.S. Dollar Index
DXY,
-0.09%
briefly dropped by as much as 0.5%. Oil futures touched their lowest prices in three weeks, then shook off early losses, as traders weighed prospects for demand.Here’s why assessing the most likely path forward for inflation is more complicated than it might appear, though.

Of all the possible scenarios that could play out, the one in which inflation falls but doesn’t head toward 2% fast enough is perhaps the most underappreciated risk in financial markets, according to money managers, economists, and strategists interviewed by MarketWatch. The end result would be that Federal Reserve officials may be forced to push interest rates even higher than most people currently imagine and to keep them there for as long as needed, even if inflation shows signs of gently easing, they said.Read: Fund managers are overwhelmingly forecasting stagflation next year with no one anticipating Goldilocks scenarioOctober’s data is a “good” start, but “if financial conditions ease up and consumer spending remains strong because people think the inflation problem is solved, we’re just going to go back to where we were” with aggressive rate hikes, said Eric Sterner, chief investment officer at Apollon Wealth Management, which manages $2.5 billion and is based in Mount Pleasant, South Carolina. “We’re going to be under restrictive interest-rate levels for a while, and if we get a year of inflation around 7% — I don’t think we will, but if we do— that would be enough to …

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