December 9, 2021
Tomorrow’s CPI report will undoubtedly have an impact on markets. From a longer-term perspective, inflation rates impact equities/equity valuations through four main inputs: 1) consumer spending; 2) corporate margins; 3) perceived Fed policy and; 4) bond yields. Consumer spending data has been extremely healthy lately with last month’s retail sales number at a record high and 23% above levels from December 2019. And with November services ISM also at a record high, it’s apparent the recent spike in inflation has had little impact on consumer spending. Corporate margins have also held with Q3 S&P 500 earnings/management calls highlighting an ability to fully pass along input costs. A higher CPI print tomorrow could pull rate hike expectation further into H1’22, but the Fed has clearly linked liftoff with a normalization of labor markets, which seems more like a H2’22 event. Persistently high inflation rates this fall have driven short-dated and 10-year breakeven yields higher, resulting in a flatter yield curve and persistently negative real yields.