Is Monetary Policy About To Become More Stimulative?

1) INFLATION – There’s a lot of fear about inflation these days, and rightly so, given that oil is at about $100/barrel for WTI. Truflation aggregates millions of real transaction data points to arrive at their real-time CPI figure. Their CPI is at 1.72% right now, still below the Fed’s 2% target, even though goods inflation is running at 3.7%. That’s higher mainly due to current gasoline prices. The bottom line is that a 1.72% Truflation CPI points to markets pricing one thing (accelerating inflation) while the data suggests another.

2) RATES – This chart suggests that U.S. monetary policy is now expected to be more stimulative than markets thought just a month ago — even though “rate expectations” have gone up a bit. That shift is inflationary. This chart suggests that markets now expect much lower real borrowing costs going forward, and that would be economically stimulative. Why? Rate expectations have risen, but nominal rates/bond yields/expected Fed policy rates are a little higher than they were a month ago (less rate-cutting priced in). BUT inflation expectations have risen even more. Net result? Real rates fall → policy becomes more stimulative in inflation-adjusted terms. Lower expected real rates make borrowing and spending cheaper in real terms. That tends to A.) Boost demand in the economy; B.) Push inflation higher (the “adding to inflation pressures” part); C.) Be bullish for cyclical stocks, commodities, energy, materials, real assets, and generally weaker for the U.S. dollar. It’s basically the market saying: “Even if the Fed doesn’t cut as much as we hoped, inflation is picking up enough that the real cost of money is still getting easier — and that’s inflationary."

3) SENTIMENT – With all the negativity being thrown at us on financial TV and social media about the economy, oil, war, and stock markets, it was probably easy to miss the recent sentiment reading. I’m not talking about the Univ of Michigan survey that everyone wants to point to, which dropped from the previous month. I’m talking about what real money is actually doing versus a survey. That’s found in the “net call volume” data within the options market. The current net call volume and the associated total put/call ratio of 0.96 reflect a mildly bullish sentiment in the overall options market. And that’s in the midst of a -3.4% week for the S&P 500! So on Friday, investors bought and sold way more calls (these are the “go up” bets) than puts (the “go down” bets). What’s this really like? It’s like most kids on the playground are shouting, “The toys are gonna get more expensive! Let’s be happy and excited!” instead of “Uh oh, hide your toys!” So amidst all the “gloom and doom,” there’s an undertone in the options market that’s a little happy and hopeful.