Financial markets may be in for a surprise when the next consumer price index report is published Friday. Traders of derivatives-like instruments known as “fixings” are betting that the headline, year-over-year CPI reading for November will rise by 6.9%.
Financial markets, still on a rollercoaster ride given the unknown impact of the coronavirus omicron variant and the Federal Reserve’s hawkish turn, may be in for a fresh surprise when the next U.S. consumer price index report is published Friday.
“Fixings have been more spot-on than economists have been, in general, this year,” said Omair Sharif, president of the Los Angeles-based research firm Inflation Insights. “That’s because fixings are not just about pure expectations for inflation. They also have premiums built in to account for inflation being higher than what you would expect, and obviously inflation came in stronger.”
Earlier this year, for example, fixings traded at levels that implied the headline annual CPI rate would come in at 3.7%, 4.9% and 5.1%, respectively, for April, May and June. Actual readings turned out to be 4.2%, 5% and 5.4% — putting fixings closer than economists’ median estimates of 3.6%, 4.7%, and 5%.
“If anything, the fixings have actually undershot the actual prints all year,” said Chris McReynolds, head of U.S. inflation trading for Barclays Plc BARC, +0.21% in New York. While some might be “shocked” when they see the next CPI prints, “I believe that most of the world of finance has opened their eyes to inflation risks and are cognizant of the upside risks.”
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