Michael M. Santiago/Getty ImagesIn a little-known part of the financial market that’s had the most accurate reads on U.S. inflation so far, traders are pricing in an annual headline rate on the consumer-price index of 8.5% or higher for the next five months, starting with May. As of Tuesday, fixings, or derivatives-like instruments related to the market for Treasury inflation-protected securities, or TIPS, imply that May’s year-over-year consumer-price index reading on Friday will come in at 8.5%. That’s above the 8.2% median forecast of economists polled by The Wall Street Journal and would match the 40-year high hit in March. Fixings traders also see the rate climbing to 8.6% in June and July, before hitting 8.8% in August and September. October’s reading is seen at 8%.The chart below shows where the headline CPI rate is expected to land relative to the year-earlier period.Source: BloombergInvestors have been oscillating between competing narratives in which inflation either starts to actually break lower or breaks lower but turns into a false hope. Not many appear to be set up for the possibility that headline CPI readings simply keep running hot, even as the Federal Reserve aggressively hikes interest rates. U.S. stocks swung between gains and losses on Tuesday as investors await Friday’s CPI print for May.Fixings are traded by hedge funds, mutual funds, money managers, and essentially anyone involved in inflation swaps. If their views pan out, “a much more aggressive Fed tightening schedule would begin to get priced in and we will probably see more half-point rate increases through the rest of the year,” said Edward Moya, a senior market analyst for the Americas at Oanda. “Obviously, the bond market would sell off and investors would struggle to hold on to risky assets.” Broadly speaking, expectations had been shifting in favor of the view that inflation could be peaking in a couple months, Moya said via phone. Behind the anticipated continued rise of the CPI rate seen by fixings traders is higher energy and food costs, with Russia’s war on Ukraine playing a major factor, according to Gang Hu, a TIPS trader with New York hedge fund WinShore Capital Partners.“The fixings market is saying we are going to have fairly strong prints for the next five to six months, and then the market has no confidence that we are going to see a peak on inflation: It doesn’t know exactly when inflation is going to slow down,” Hu said via phone. As of Tuesday afternoon, all three major stock indexes were higher, with Dow industrials DJIA up by 0.6%. The S&P 500 SPX and Nasdaq Composite COMP were each up by 0.7%. Meanwhile, most Treasury yields were down, with the 10-year rate BX:TMUBMUSD10Y pulling back below 3%.

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