Inflation is demonstrating both strong and building momentum in the U.S., U.K., Canada and the euro area — leaving central banks likely “too optimistic” about it falling back down to targets, according to James Rossiter of TD Securities.
His view comes a day ahead of the U.S.’s next major inflation reading and is based on TD’s own diffusion indexes, which show “strong upward momentum,” according to a Tuesday note titled “No Sign of G10 Inflation Turning Yet.” The share of consumer-price index basket items that are growing by more than 5% year-over-year is now 63% in the U.S., 57% in the U.K., 51% in Canada, and 26% in the euro area, says Rossiter, head of global macro strategy.
Financial markets have been rattled over recent days by worries about a combination of slower growth and higher inflation
Though investors piled back into risky assets following three days of selloffs in the U.S., a sharply higher open on Tuesday gave way to moderation in the morning. Dow industrials DJIA, -0.24% rose less than 0.1%, the S&P 500 SPX, -0.14% was up by 0.2% and the Nasdaq Composite COMP, -0.03% was higher by 0.5%. Investors also flocked back to the safe haven of Treasurys, sending yields significantly lower across the board.
Inflation expectations continue to rise, though they are showing signs of topping out in some regions, according to Rossiter. While inflation has likely peaked in North America, and is expected to peak midyear in Europe, “inflation risks are skewed to the upside, especially if [Russian President Vladimir] Putin weaponises energy against Europe later this year.”
Traders of derivatives-like instruments known as fixings are expecting the annual headline rate in Wednesday’s consumer-price index report for April to come in above 8% before drifting lower through next February. The level of fixings implies that financial markets aren’t yet positioned for a period of further upside in inflation.