Marketmind: The inflation conundrum

A look at the day ahead from Saikat Chatterjee.

There’s no respite for global policymakers from the dreaded “I” word. They may have spent the greater part of the last two weeks reiterating their belief that high inflation is transitory, but markets remain wary of buying into that message.

Hardly surprising, given recent data prints. Chinese factory gate prices gained at their fastest clip in a quarter century, according to latest data, which follows on from Tuesday’s solid production inflation reading in the United States.

Then add in a fourth straight day of higher oil prices, with Brent crude at $85 a barrel.

The widening disconnect between policymakers mantra and economic data pushed Wall Street into the red on Tuesday, ending an eight-session run of all-time closing highs.

So despite a slew of forecast-beating company results — the bumper Q3 earnings season has seen 81% of the S&P 500 names beating estimates so far — European and U.S. stock futures are pointing south on Wednesday.

The nervousness around price pressures is even more palpable in bond markets, where investors are rushing to scoop up inflation-linked debt. Inflation-linked, or “real” bond yields are now below -1.1% in the United States, below -2.0% in Germany, and below -3.2% in Britain.

Then there are swirling concerns about China’s cash-strapped Evergrande’s ability to make an offshore bond payment before a Wednesday deadline, and what you have is Wall Street’s “fear gauge”, the VIX at a one-month high.

The safe-haven Japanese yen too is catching a bid, taking the dollar to a one-month low below 112 yen.

Another test looms. The U.S. consumer price index, due later on Wednesday, is predicted by a Reuters poll of economists to come in at an annualised 4.3%, versus the Fed’s average annual 2% inflation target.

Key developments that should provide more direction to markets on Wednesday:

-Macro corner: German CPI, Italian industrial production, U.S. initial jobless claims.

-Japan manufacturers’ mood falls to 7-month low

-Allianz raises full year outlook after a better-than-expected 2.3% rise in Q3 net profit.

-Credit Agricole Q3 profit beat expectations due to lower bad loan provisions and higher retail revenue

– Shares of China’s Fantasia Holdings developer plunged 50% after it said there is no guarantee it can meet debt obligations

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