In the wake of an in-line CPI, Wall Street bets on bank stress

‍Pieces of a puzzle

The inflation puzzle currently consists of two key pieces: price stability and the stress experienced by the banking sector.

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As we have seen, consumer prices are still on the rise, though at a slightly moderated pace. However, today's data will likely be dismissed as meaningless because the other half of this story risks making today's statistics all but irrelevant. For us to really understand how financial conditions are changing, we will have to wait until Friday, when the banks begin their earnings reports. 

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There is perhaps a better explanation for why the market tends to dismiss rising core inflation as old news. Stocks and bonds popped after the inflation data. As traders once again predicted, almost one percentage point in rate cuts would take place over the next 10 months, a prospect that both Jay Bryson, a Wells Fargo employee, and Jeff Rosenberg, a BlackRock employee, both regarded as unlikely.

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In this particular case, there's a lesson about how to use the term "data dependent" in the context of a favorite Federal Reserve catch phrase: There is a lot that depends on the type of data you use. As Blerina Uruci points out, a recent reading of the CPI, which arrived while Silicon Valley Bank still had its fallout, is a perfect example of how economic readings are affecting investors.

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The information we are getting now is based on information from before SVB and the bank failures, she told me, if credit conditions tighten, we will see an increase in inflation and a decrease in economic activity.

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Moreover, the RBC's Amy Wu Silverman said that she would focus on the banks' results rather than inflation data, noting that she did not believe inflation data was all that important.

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Probably the only time it's going to be a matter of financial earnings rather than the Consumer Price Index, which has dominated everything from the very beginning," she explained. "People are truly going to be hanging on every single word that the management team says."

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Ebrahim Rahbari, a Citigroup economist, said he expected policymakers to look for any excuse to tap the brakes on inflation even if Uruci believes that the Fed does not have the luxury of waiting on future rate hikes in order to curb inflation.

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In Rahbari's opinion, the banking situation is adding a whole new dimension to these concerns. He went on to say that the Federal Reserve is going to be paying careful attention to these concerns.

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There is a world full of danger

The topic dominating the local discussions at the IMF and World Bank spring meetings this week wasn't inflation or the Federal Reserve, but rather the topic of geopolitik, the most important aspect of global politics.

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He told a humorous observation concerning China’s commercial and diplomatic overtures abroad when he was an assistant secretary of state for political-military affairs. He said that he had served in the US Army for more than thirty years and had been active in the Middle East for years. You don't have to swing a dead cat to hit a Chinese businessman every single day.

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Despite the quip, behind it was a sobering warning regarding China's threats of hegemonic dominance in the future.  

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According to Tim Adams, chief executive officer of the Institute of International Finance, his biggest concern is the state of US-China relations, which seem to be deteriorating by the day. P.S. : He is also concerned about a possible increase in bank stress.