US inflation

Pleasingly, our note overnight held up well against the subsequently released US CPI print (7.5%, comfortably ahead of expectations.

Now the year on year comparisons are a tad pointless, because of base effects and the noisy pandemic impacts. What we care about is the month on month. That’s the one the policy makers will be most keenly focused upon.

And that remains stubbornly high, and well ahead of expectations (0.60%, vs 0.40% expected).

The Fed is well behind the curve, and is presently still expanding the balance sheet via QE.

So, the odds of a move (terminating QE, announcing the balance sheet run-off, putting forward a number [e.g. 50bps]) grow more likely, and we are now talking about “out of cycle” hikes.

Yields everywhere have risen, and the Aussie 10 year is sitting a touch below 2.2%.

We plan to continue to narrow our underweight to fixed income. Our ceiling target is 3%, and our base case is 2.25%-2.5%. We would like to be equal weight by 2.5%, and overweight on the path to 3%.

These might sound like small moves, and really only grants us space of ~20bps per purchase, but with a duration of ~7 years, in a defensive asset class, it really isn’t that small.

The odds of the Fed hitting inflation hard enough to get it back, in short order, to 2-3% would absolutely require hitting growth, and dramatically raises the possibility of a recession induced error (because hard landings are hard) or at the least, trigging an equity market correct.

We would prefer to have a bit more duration in the portfolio, in that context, in our defensive assets.

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