In a market basking in the prospect of the reflation trade, there’s the gnawing concern, at least amongst some in the market, that that Goldilocks condition is precariously close to boiling over into outright inflation. Though the risk isn’t seen as being significant in the short-term, with economists predicting a relatively modest 0.2 per cent increase in core CPI for the month, any upside surprise in inflation data will only amplify the calls that the US economy runs the risk of running too hot.
How the Fed might respond to such a set of circumstances will also be crucial, and will be homed in on tonight, as US Federal Reserve Chair Jerome Powell delivers an address to the Economic Club of New York. As per usual, market participants will hanging off every word Chair Powell has to say. The crucial issue, given the preoccupation with inflation risks right now, is whether the Fed will keep the punch bowl nice and full for the markets, even in the face of rising inflation expectations.