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The Federal Reserve now looks set to raise rates in December, partially based on expectation that inflation is set to finally rise to its 2 percent target. There's only one potential problem.
There's actually a way that markets can see where investors think inflation will go. And they do not exactly see eye to eye with America's central bank.
Over the next five years, annual inflation is expected to run at less than 1.3 percent. Even over the next ten, investors are looking for no more than 1.6 percent per year.
The Fed is well aware of this thinking among investors. In fact, the minutes to the Fed's October meeting record that "a couple of members expressed concern about the continued decline in market-based measures of inflation compensation."
To be sure, the comparison here is not apples-to-apples.
The popular market-based measures of inflation referenced above are simply found by comparing the yield on a Treasury bond and a Treasury Inflation-Protected Security (or TIPS) of the same maturity.
Since a TIPS bond pays an investor an amount that varies with the Consumer Price Index (CPI), and a Treasury bond is not adjusted for inflation, the Treasury yield minus the TIPS yield should theoretically produce the market's expectations of inflation. That number is known as a "breakeven rate" (since it is the inflation amount that will make the TIPS investor and the Treasury investor break even with each other).
While the breakeven rate reflects expectations about the more popular CPI inflation rate, the Fed targets the alternative personal consumption expenditures (PCE) metric.
Still, it is the trend in the breakeven rate that the Fed has its eye on, rather than the absolute percentage. And while the PCE and CPI readings may differ from month to month, the measures are almost perfectly correlated over time.
One of the biggest stated concerns for stocks over the past year has been the tightening of monetary policy by the Federal Reserve. But for the famously bullish Tom Lee, those who expect a Fed hike to hit stocks are getting something wrong.
When asked about the potential consequences of a Fed rate hike in December, Lee said: "I think markets are really going to embrace this, and it's going to be quite constructive."
Lee, the former JPMorgan strategist now with boutique research firm Fundstrat Global Advisors, said "equity markets are anxious to really get some clarity from the Fed, and of course we interpret that to mean the Fed to start moving," particularly after so many months of speculation about when the first hike would come.
A December move wouldn't exactly be a shock to the market; to the contrary, "we know fixed income markets and credit have priced in some type of move," Lee said Thursday on CNBC's "Futures Now."
Investors are clearly obsessed with the question of when the Federal Reserve will first raise rates. Yet it's the pace of future increases that could ultimately be more important for risk assets.
Fed presidents James Bullard and Jeffrey Lacker made headlines this week when they told reporters that the any rate hikes after the first one will not necessarily be gradual, and will not be on a predetermined path.
To be fair, they are among the most hawkish members of the Federal Open Markets Committee. Lacker's was the the lone dissent to the Fed's decision not to raise rates in September, and Bullard has said that he would have dissented had he had a vote, which he will in 2016.
Still, the idea that subsequent rate target increases will be gradual no matter when the Fed hikes has become a key part of market speculation. Fed chair Janet Yellen frequently directs attention away from hike number one to the slow hikes beyond it.
Meanwhile, Bullard's and Lacker's comments served to remind investors that if the Fed's actions are truly data-dependent, such vows can really only serve as a forecast.
If inflation finally picks up, as the Fed's hawks expect it will, the central bank would obviously be hard-pressed to increase rates rapidly in order to fulfill its mandate to maintain stable prices — particularly since the "maximum employment" side of its mandate appears to be well-met with job creation on the rise.
But that doesn't prevent the doves from suggesting a promise-heavy policy path.
"It is critically important to me that when we first raise rates the FOMC also strongly and effectively communicates its plan for a gradual path for future rate increases," Chicago Fed president Charlie Evans said in a Thursday speech.
He explained that if the committee failed to provide such guidance, it would be an "important policy error" because it might induce people to believe the Fed "is less inclined to provide the degree of accommodation that I think is appropriate for the timely achievement of our dual mandate objectives."
Whether or not such a belief would be justified is a separate question entirely.
Crude oil is pacing for its worst weekly performance in the last three months as concerns about slowing global growth and a strengthening dollar have commodity traders hitting the sell button. And that has one group of traders very happy: short sellers.
"Open interest increased by 33,000 contacts on [Wednesday], so that's a significant addition of shorts," BNP Paribas' head of U.S. cash equity trading, Darren Wolfberg, said Thursday on CNBC's "Futures Now." Government data released Thursday showed U.S. supplies rose for the seventh straight week.
Wolfberg explained that when open interest rises on a day that an asset is down — crude oil fell 3 percent Wednesday — it means that traders are making new bets that the price will go lower. Conversely, he added that in early October, the increase in open interest was tied to a move higher in crude oil, reflecting more long positions.
"This is actually a good barometer to know the underlying flows of the marketplace," he said. When investors go short, they are betting a security or commodity will fall in value.
The Grinch has nothing on Peter Schiff.
On CNBC's "Futures Now" Thursday, the contrarian investor said that while Americans are wrapping presents this holiday season, they should instead brace themselves for "a horrible Christmas" and possible recession.
"I expect [job] layoffs to start picking up by the end of the year," Schiff said, pointing to retailers as the first victim. "Retailers have overestimated the ability of their customers to buy their products. Americans are broke. They are loaded up with debt," he said. "We're teetering on the edge of an official recession," and "the labor market is softening."
For Schiff, there is no one else to blame but the Federal Reserve. As he sees it, the central bank's easy money policies have created a bubble so big that any prick could send the U.S. economy spiraling out of control. And that makes the possibility of hiking interest rates slim to none.
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"The Fed has to talk about raising rates to pretend the whole recovery is real, but they can't actually raise them," said the CEO of Euro Pacific Capital. "[Fed Chair Janet Yellen] can't admit that she can't raise them because then she's admitting the whole recovery is a sham and that the policy was a failure."
It's been a tough year for commodities.
Gold, crude oil and natural gas are down a respective 6, 11 and 21 percent in 2015. Those returns have caused the S&P GSCI commodity index to hit its lowest level since the financial crisis. It's also on track for its fourth worst year on record, but according to one expert, there could be signs of a bottom.
"The ugliest month [of the year] was in July where every single commodity was negative except one," Jodie Gunzberg told CNBC's "Futures Now" on Tuesday. "But we had a major comeback in October; where more than half became positive on the month, and we've never seen that kind of swing before when so many commodities were down."
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Gunzberg, global head of commodities at S&P Dow Jones Indices, noted there were two other instances in the S&P GSCI commodity index where a sharp rebound resulted in a short-term bottom for commodities. "In January 2009, 11 single commodities came back just before the S&P GSCI hit its bottom," she said. Gunzberg noted there was a similar pattern in 1998, where the space staged an incredible comeback off the low.
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