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Stopped trading reflection in the bond market needs real inflation

(Bloomberg) – Reflationary trade, which dominated the bond market in early 2021, has taken a breather, leaving investors ready for a key data set next week that could potentially confirm expectations that price pressures will evolve as the economy recovers. All eyes will be on the release of the US consumer price index in March for March, which is expected to show a significant jump. The number is likely to be distorted by a large drop in data from a year earlier when the pandemic broke out. But retailers may not want to reject the acceleration – as they have done to some extent with producer price data stronger than projected on Friday – if there is a growing sense that this marks the beginning of a trend. Statistics come at a crucial time for bear bonds betting on reflation. Market measures of inflation expectations, spurred by the extremely loose Federal Reserve policy and immense amounts of fiscal stimulus, have stopped near multi-year highs and still need to be substantiated by real data. The same is true for the yield curve gauges, which have retreated from recent peaks. It’s not just bond positions: without data tracking, Fed tightening bets can fade as soon as the end of 2022, potentially reducing demand for a surprisingly resilient dollar. “We don’t have a strong trade swing right now because people are waiting for more data,” said Daniel Tenenhauser, head of marketing strategy at Bank of New York Mellon Corp. ” As the data comes in, we’ll probably see again that inflation trading will be stronger “towards the middle of the year. Tenengauzer says any inflation reading counts from this point because“ the longer inflation stays 2.5%, the annual CPI reading last seen before the pandemic took hold, “the more underwater you are than holding a fixed income.” Ten-year Treasury yields rose on Friday as they ended below peak days, after the PPI report showed 4.2% growth in compared to March 2020. Although it was compared to the period when the pandemic caused a drop in prices, it was the biggest annual gain sinc 2011. The reference yield has retreated since approaching 1.8% last month, the highest since January 2020. There are strong arguments on both sides of the inflation debate as the market moves from a stage driven by rising expectations for price pressures, to one in which investors are looking for data backups.There is also the view that expectations for growth, not inflation, could eventually dominate the treasury narrative later this year, through higher real yields. Inflation Psychosis Chairman Jerome Powell, who is due to appear at “60 Minutes” on Sunday and also spoke on Wednesday, said any rise in inflation is likely to be temporary. Meanwhile, Hoisington Investment Management Co. in his last quarterly report said fears of inflation were a “psychosis” that would disappear. But that doesn’t mean a jump in the consumer price index won’t briefly scare bond investors. The figure is projected to show a year-on-year increase of 2.5% in March, the highest since January 2020 and above any point on the yield curve. It is a development that can also undermine inventory. “The market has been appreciating the topic of reflation since the second half of 2020, but strong, realized footprints would almost add fuel to the fire,” said Shahid Ladha, head of the 10-Foot Strategy Group for America at BNP Paribas SA. That, in turn, would produce an inverted risk to yields to mid-maturity due to the possibility that the Fed would have to tighten sooner than expected, he says. Investors are also tasked with absorbing the combined $ 120 billion in coupon auctions next week, including 30 years of debt, as they consider the issue of inflation. Although expectations of a higher consumer price index may be worrying, the past month has shown that there is sufficient demand for treasuries, which should help lubricate future bond auctions, Tenengauzer said. April: NFIB optimism for small businesses; CPI; average earnings April 14: MBA mortgage requirements; import / export prices; Fed’s Beige Book April 15: Unemployment Claims; retail; Empire production; Philadelphia Fed Business Outlook; industrial production; Consumer comfort Langer; business inventories; NAHB Housing Index; TIC flows April 16: Building permits; starts housing; University of Michigan Sentiment Fed Calendar: April 12: Eric Rosengren of the Boston Fed April 13: Patrick Harker of the Philadelphia Fed; Mary Daly of the San Francisco Fed; Thomas Barkin of Richmond Fed; Raphael Bostic of the Atlanta Fed, Loretta Mester of the Cleveland Fed and Rosengren at the Racism and Economy Event on April 14: Robert Kaplan of the Dallas Fed; Powell talks to an economic club in Washington; Beige Book; John Williams of the New York Fed; Vice President Richard Clarida discusses the new policy framework; Bostic April 15: Bostic; Daly; New York Fed Executive Vice President Lorie Logan; Clarida; MesterApril 16: Kaplan in two appearances Auction schedule: April 12: accounts of 13 weeks, 26 weeks; 3-, 10-year notesApril 13: 30-year bondsApril 15: 4-, 8-week billsFor more articles like this, visit us at bloomberg.comSubscribe now to take advantage with the most reliable business news. © 2021 Bloomberg LP