5-year Breakeven Inflation Rate.
I am sure that we all wake up every day and go straight to the computer to look for the daily 5-year Breakeven Inflation Rate. I know I do. (sarcasm emoji here).
I am on the Stock Market Nerd emailing list. I usually scan the weekly reports and next-to-the-bottom I read this:
5-year breakeven inflation is rapidly plummeting towards 2%.
Google-time! Good or bad? And what the heck is it?
" What is a 5 Year breakeven inflation rate?
“The 5 Year TIPS/Treasury Breakeven Rate is calculated as the difference between the 5 year treasury rate and the 5 year treasury inflation-indexed security rate. Market participants use this value as what they believe the expected inflation should be in the next 5 years, on average.”
So if the average inflation rate over the next 5 years actually does come in at 2%, is that good or bad? 2% is obviously great. Back up the truck!!! But is that consistent with the Fed continuing up to, say, 5.5%. Can we get there or 6% and what would it take to get a 5-year average back down to 2%? If that is really expectation, then why is the market in such a dour mood? Is this just one side of a tug of war that is causing these rallies that cannot be sustained? The choppiness that Dreamer bemoans?
The Nerd continued:
January inflation data stunk. February inflation data has been ideal. Not only was the CPI largely in-line with the PPI very cool vs. expectations, but that progress should continue. Backward looking rent inflation is the source of the still elevated readings. Owner equivalent rent, Apartment List’s rent index and the tanking Truflation reading all point to that inflation falling in real-time. Add to that cratering energy prices and diminishing monetary velocity via banking fragility, and the disinflationary trend is fully back.
“The Fed finally broke something. Time to adjust. As they adjust, monetary policy should get easier, liquidity should get more favorable and long duration assets like growth stocks should fare better. Not in linear fashion… but over time with many fits and starts. We shall see.”.
Not in linear fashion, many fits and starts. Once (if and when) the narrative becomes “the disinflationary trend is fully back”, the market will be off to the races. And of course the narrative will change quite some time before the reality arrives. When does the narrative change, Papa Smurf?
Are we there yet? Can I grasp that straw?. If I look through it, is that light at the end of the tunnel that I see? Any green shoots in the Midwest, folks?
Don’t know, but this is the first data point that I have seen that points in the direction of good inflation “news” or expectations or delusion.
Strap in. Another Monday.
Sort of a PS. Editing to add this. I think it does not require subscription. Dark Forest: The Brutal Game of Modern Banking - Epsilon Theory