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Market Update

Latest CPI data shows prices increasing at fastest rate since 1990

Date:
November 15, 2021
  • Scott Balta headshot

    Authors

    Scott Balta

    Associate

    Corporates | Kennett Square, PA

Summary

The latest CPI data came in significantly above expectations, leading to some risk-off sentiment in markets. Expected timing for future rate hikes in the U.S. moved forward, which led to appreciation in the dollar.

Inflation

The latest CPI reading, for the month of October, showed a 6.2% year-over-year increase in prices, significantly higher than the expected 5.8%, as well as September’s 5.4%. The month-over-month change was also larger than expected at 0.9% compared to a 0.6% forecast. The annual reading was the highest since December 1990 and will add to fears that supply chain bottlenecks and rising energy costs are causing more persistent inflation than the Fed originally anticipated. Equities fell in response to the news, and Fed funds futures markets showed increased expectations for a potential rate hike as soon as July 2022.

Infrastructure plan passes

The House successfully passed an infrastructure plan with more than $1 trillion in improvements intended for transportation, utilities, and other areas. The plan is part of a broader fiscal policy agenda, including an additional $1.75 trillion targeting social safety nets and climate reform, which has yet to pass. Democrats will need almost unanimous support for the latter package as they look to push it through the legislature later this month. Even if they succeed, December will bring new challenges, as the need to address the debt ceiling (which was pushed back temporarily in early October) returns to the fore.

Dollar surges on CPI data

The U.S. Dollar index surged to a 52-week high following the latest CPI reading, as the prospect of a rising interest rate environment in the U.S. helped strengthen the currency. This adds to momentum the dollar accumulated last week following dovish outlooks from foreign central banks, like the Bank of England. Both GBP-USD and EUR-USD recently hit year-to-date lows, at 1.33 and 1.14, respectively.

For companies with predominantly USD expenses and foreign-denominated revenues, the recent trends towards dollar strength may be creating unfavorable FX-related noise in financial statements. Chatham recommends exploring operational FX hedging strategies to mitigate such impacts and create a smoothing effect during volatile times.

(Related insight: Read "Six key steps to implementing an operational FX program")

The week ahead

On the data front, we have retail sales and initial jobless claims next week for continued insight into macroeconomic health. The next FOMC meeting isn’t until mid-December, but markets will scrutinize any public comments from committee members in the meantime to see if the timeline for rate hikes is shifting under the inflation threat.

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Disclaimers

Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit chathamfinancial.com/legal-notices.

Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions. All rights reserved.

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