The combination of last week’s renewed fears that inflation might not be quite dead after all and this week’s Fed FOMC meeting means that speculation on prices will dominate the talking and trading points this week in the financial markets.
Inspired by the news, the gold market has started inching up again. The dollar, meanwhile, is slipping, as per the U.S. Dollar Index.
The anxiety is spilling over into the equity markets. The S&P 500 last week continued to wander sideways, waiting for a clearer picture of what this week will bring. The market for the benchmark 10-year Treasury Note has also become cautious now that inflation has returned as a topic of discussion.
Inflationary talk may be good news for commodities, but the prospect that pricing pressure is still on at a time when U.S. economic growth is forecast to slow has kept raw materials treading water if not slipping in recent sessions.
But while inflation talk is back, investors should put the trend du jour in perspective. As the chart below reminds, the market’s expectations for inflation are higher but only marginally so. That may change in the coming days and weeks. Much depends on the Fed FOMC confab on Tuesday and Wednesday.
Meantime, the market’s outlook is that the central bank will keep Fed funds unchanged at 5.25%, with a prediction of a 25-basis-point cut later this year, based on futures trading. That leaves the great unknown at the moment: the wording of the accompanying press release from the FOMC on Wednesday afternoon.
Between now and then, the speculators have the floor.