From the Trading Desk: Inflation is Here to Stay

April commenced with fresh data from the Bureau of Labor Statistics showing that the CPI (consumer price index) rose 8.5% year over year last month compared to March of 2021, a level that marks the fastest increase since December 1981. Fed officials discussed acting more aggressively to combat rising inflation, even suggesting various policymakers “would have preferred a 50bps increase instead of 25bps last month.” 

Bond prices have declined sharply globally yet with some relief last week. The downward pressure on bond prices and the trend of rates rising remains in place. 

Euro-Bund (RX) 12-months

Has the market weighed additional aggressive rate hikes, and will we see further decline in bond prices?

Some think the impact of aggressive rate hikes will not be as drastic as it could have been a few months ago. Yet even after the Fed’s intervention. it is unlikely we see inflation fall to the central bank’s 2% stated goal anytime soon with the current geopolitical pressures. 

The widely seen yield curve remains a focus. 

US Treasury Actives Curve (YCGT0025 Index) Last

In addition, President Vladimir Putin said last week that talks with Ukraine are “at a dead end” and committed to continue Russia’s invasion, therefore continuing pressure in various commodity markets. 

Global grains have skyrocketed since the beginning of the year. As a reminder, Ukraine and Russia are some of the world’s largest exporters of grains. Countries that rely on importing their grains are extremely vulnerable in finding enough food to feed their citizens. Countries in the Middle East and North Africa are at a “breaking point’ according to the United Nations’ World Food Program. As an example, Russia and Ukraine provided 80% of Egyptian wheat imports over the last five years. 

Commodity market supply has been under pressure for years. With tight supply, unfavorable headlines tend to have a major impact on markets. Ukraine’s next corn crop is expected to be fall by 40% from last year as the prices reached levels last seen in 2014. 

Corn (C) 2014-2022

We are living in an environment where having exposure to commodities will likely prove highly beneficial to an investor’s portfolio yet gaining that kind of exposure is difficult to achieve for most retail investors with a limited universe of imperfect ETFs and mutual funds.