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Market Update

Non-core inflation strikes again

October 12, 2021


Despite many central banks’ transitory inflation perspectives, inflation returned this week as commodity and food prices continued to rise. The five-year breakeven inflation rate, a broad measure of the market’s long-term inflation expectation, hit its highest reading since May after rising 13 basis points since last Friday. Meanwhile, with just days to spare, it appears congress will avoid a U.S. default.


The FAO Food Price Index (FFPI) is published by the Food and Agriculture Organization of the United Nations, and is a measure of the monthly change in international prices of a basket of food commodities.

FFPI averaged 130.0 points in September, meaning global food inflation was up roughly 1.2% from August and 32.8% year over year. The key drivers were increases in wheat, grains, and vegetable oil. The report cited strong Chinese demand, supply chain issues, labor shortages, weather events, and reduced commodity production in Russia, Malaysia, and Brazil as general drivers of price increases.

When adjusted for inflation, the FFPI hit its highest reading in more than three decades. The index helps explain why many food manufacturers are raising prices across the world.

OPEC refuses to boost oil output

The price of West Texas Intermediate hit $80.52 per barrel on October 11, the highest level since October 2014. It hit this seven-year high after OPEC+ declined to dramatically ramp up output. Rather than increasing production by millions of barrels, the cartel instead opted to increase collective output by 400,000 barrels a day in monthly installments. Demand for oil continues to increase as the prices for coal, natural gas, and other alternatives continue to hit multiyear highs across Europe, Japan, and China. According to the U.S. Energy Information Administration, the world will produce more crude oil than ever before, at an estimated 98.9 million barrels per day. However, there are fewer oil rigs that can be started both domestically and internationally to help reduce the price. According to Baker Hughes Inc., the number of rigs in the U.S. dropped roughly 75% since 2014. Likewise, the global decline in rigs over the same period was a bit more dramatic at 78%. In other words, OPEC+ controls a higher proportion of operational oil rigs during this oil boom than the last, giving them a market advantage.

Washington aims to postpone default

To avoid another recession, President Biden and Democratic Party leaders have increased pressure on Republicans to allow for a debt limit increase. With less than one week until an expected U.S. default on October 18, Mitch McConnell and Republicans are prepared to allow Democrats to increase the debt ceiling until December. They have previously used the filibuster process to prevent Democratic debt limit bills from reaching the Senate floor. The proposal would not allow for a suspension of the debt limit, but an increase to the current debt limit of $28.4 trillion. This would prevent a U.S. default, at least until December, and force Democrats to suspend the debt limit with reconciliation if they pass additional spending measures. Assuming the two parties can come to an agreement soon, the debt limit drama will be a present that resurfaces during the holiday season.

Treasury rates and equity prices

Over the last week, the ten-year treasury increased slightly from 1.4790 on October 1 to 1.6120 on October 8. The broader increase since June can mainly be attributed to the Fed’s more hawkish stance and intent to begin quantitative easing. More recently, increased commodity prices and a 13 basis point jump in the five-year breakeven inflation rate in the last week has put upward pressure on treasury rates as investors compensate for higher expected inflation.

(Related insight: Read "Managing interest rate risk on future debt issuances")

Equities have been mixed as they react to inflation concerns, increased treasury rates, and reductions in both U.S. and global economic forecasts. The technology-heavy NASDAQ has been particularly reactive to treasury rates. As rates rise, the present value of the sectors’ future returns become less attractive to investors.

The U.S. gained 194k jobs in September, making it the second month in a row of job growth that was well short of expectations (+500k for September), while the unemployment rate dropped to 4.8%. There is a lot of speculation on whether these disappointing numbers will put a pause on the Fed’s tapering plan. On the one hand, before the numbers were released the consensus seemed to be that the Fed would move forward with tapering no matter what. On the other hand, the number was more disappointing than people expected, leading to speculation that the Fed could either hit the brakes or at least slow the pace at which they taper. If anything, this report seems to reinforce that interest rate hikes could be a long way off as the Fed has indicated wanting to see full employment before hiking rates. Markets are currently pricing in November 2022 for a rate hike.

Looking ahead

The markets’ attention this week will likely be focused on the approval of a short-term debt ceiling increase that the House of Representatives plans to vote on today, and Wednesday’s consumer price index for the month of September. Sustained or increased inflation will put pressure on the Fed to reconsider waiting until late 2022 to raise rates. In addition to these events, the NFIB small business index and job openings were released today, the Fed’s FOMC minutes are released Wednesday, initial and continuing jobless claims are released Thursday, and retails sales, consumer sentiment, and business inventories are released Friday.

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About the author

  • Brandon Stitzel


    Corporates | Kennett Square, PA

    Brandon is a rotational analyst within the Global Corporates sector, working with organizations to develop and maintain risk management programs across the interest rate, foreign exchange, and commodities asset classes.


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