By Ven Ram, Bloomberg Markets Live Analyst and Commentator
When chess grandmasters meet, the opening moves are usually well-rehearsed. Then, when one makes a single non-standard move, the game becomes intriguing.
Similarly, inflation markets were moving lock-step with the Fed’s guidance so far in the current cycle. Now, traders seem to be tempting the Fed with a non-standard move by pricing faster inflation than perhaps the monetary authorities would be comfortable with. Forward inflation swaps in the U.S. closed Friday -- the day we got a payrolls print lower than all but one economist had forecast -- near the highest since 2017, uncorking latent fears. In the euro zone, traders haven’t been this optimistic about future inflation in years. In the U.K., expectations of faster inflation have been evident a while, with the 10-year breakeven rate touching 4% last week.
In other words, traders across several G-10 markets seem to be questioning the central banks’ collective refrain that inflation is transitory. However, while there is no fixed definition of what constitutes transitory, the markets may have decided that what they are seeing doesn’t fit the bill.
Clearly, that has implication for yields, term premiums and central banks’ terminal rates. It may mark the start of a next phase of excitement in the markets led by rates. The question now is whether the Fed and other central banks accept the traders’ gambit or continue to play a different line.