QI TAKEAWAY — Thanks to lagged shelter inflation, the CPI inflation peak has not been put in yet. However, the peak in the inflation curve and the TIPS asset class is in the rear-view mirror. Corporate pricing power is in the Fed’s crosshairs. Short investment grade corporate, or LQD, is the expression.
- Though CPI will still face pressure from housing in the near term, market-based expectations appear to have turned; while all points on the inflation curve now sit below 3%, this is still far above Q4 2020, when the 5-yr, 7-yr, 10-yr, 20-yr, and 30-yr were all nearly flat around 2%
- The Fed’s TIPS holdings now make up more than 20% of the market vs. the 8% share that its pre-COVID holdings represented; investor flows have helped contribute to the turning in the inflation curve thus far, but QT should bring further progress as TIPS are sold off
- TIP, the largest TIPS ETF, has continued its sell off in 2022 in light of the Fed’s talk of tightening; meanwhile, LQD, the IG bond ETF, has fallen in tandem, posting a 0.92 daily correlation with TIP as corporations stand to lose pricing power as the Fed turns hawkish