Last month's US inflation print of 7.5% made headlines even among the non-financial press, and caused money markets to overshoot in pricing an even more hawkish Fed (~6.5 hikes in 2022). The panicked hawkish market response to the inflation print is understandable as the breadth of inflation has widened, with the majority of CPI components rising at 5%+ yoy (left chart below). The extremely hawkish messaging from St. Louis Fed president Bullard also helped to catalyze market moves, allowing spot 10y yields to rise above 2.00%. However, inflation surprises are rolling over (right chart below) and we see room for the Fed to err dovishly heading into 2H22 once the inflation data peaks.
Inflation panic overdone
Inflation panic overdone
Inflation panic overdone
Last month's US inflation print of 7.5% made headlines even among the non-financial press, and caused money markets to overshoot in pricing an even more hawkish Fed (~6.5 hikes in 2022). The panicked hawkish market response to the inflation print is understandable as the breadth of inflation has widened, with the majority of CPI components rising at 5%+ yoy (left chart below). The extremely hawkish messaging from St. Louis Fed president Bullard also helped to catalyze market moves, allowing spot 10y yields to rise above 2.00%. However, inflation surprises are rolling over (right chart below) and we see room for the Fed to err dovishly heading into 2H22 once the inflation data peaks.