Markets Underappreciating U.S. Inflation, Nomura Expects 100bp September Hike

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By Sam Boughedda

A Nomura analyst said in a note Tuesday that materializing inflation risks suggest a 100bp rate hike by the Fed in September and a higher terminal rate.

"We now expect a terminal rate of 4.50-4.75% by February 2023, 50bp higher than our previous forecast," the analyst told investors. "The August CPI report – with broad-based strength across both monthly core goods and core services inflation – suggests a series of upside inflation risks may be materializing. For some time, we have highlighted an emergence of a wage-price spiral and increasingly unanchored inflation expectations as factors that could keep inflation persistently elevated for longer, requiring a more forceful response from the Fed. With the latest data, we believe those risks are starting to materialize via higher measured inflation across a broad range of goods and services."

As a result, Nomura now expects a 100bp hike in September and a 50bp higher 4.50-4.75% terminal rate.

"Despite the specific timing of those forecasts not always aligning with Fed policy action, in hindsight, the history of ratcheting up the size of rate hikes gradually suggests the Fed may have underestimated the risk of high inflation becoming entrenched," added the analyst.

Nomura continues to feel markets are underappreciating just how entrenched US inflation has become and the magnitude of the response that will likely be required from the Fed to dislodge it.

"While the Fed did not raise rates by 100bp at the July meeting, contrary to our expectations, we think recent data will encourage policymakers to revisit whether they should increase the pace of rate hikes, considering the Fed’s commitment to data dependence," the analyst explained.