Today's Inflation Print: Start Measuring Monetary Policy Reaction Functions Today

Today’s inflation print in the United States delivers considerable challenges to investors and policymakers with the reaction function visible immediately in the currency markets (parity between the EUR and the USD), equity markets, and fixed income markets.

Continued unchecked inflation paired with conflicting trends in wage and employment rates and looming energy market pressures driven by the war in Ukraine and the ongoing energy transition combine to create real questions about whether traditional economic analysis applies to the current environment.

How will central bankers react? We must watch their words and their research even more carefully than usual.

Economic data generates reaction functions among policymakers and markets, always.
The rhythm is path-dependent and predictable, if not linear.
And when it comes to monetary policy, it is crucial to compare the media coverage with actual action levels:

Until recently, markets have treated the policy reaction function as a random, exogenous variable due to basis risk. Policy-relate risks are expressed verbally while markets measure and anticipate risks quantitatively. The resulting volatility in asset prices reflects uncertainty regarding policy trends.

Advanced technology now makes it possible to measure policy-related event risks. Consider again today’s inflation print. It sets up a reaction function for all major central banks with monetary policy meetings in the next few weeks:

Are you ready?

Today's inflation data certainly generates a firestorm of media coverage. But did you know that in the last 24 hours policymakers were also taking action and providing views regarding consumption, financial stability, leverage, and stablecoins?

2H2022 will bring significant challenges as central banks and markets navigate uncharted waters. Our award-winning, patented process delivers to data-dependent investors daily, objective notional volumes that helps strategists and analysts identify all the moving pieces important to monetary policy formation. By scanning our data, analysts and researchers are able to anticipate policy action before it reaches headlines.

Strategists and analysts that access the underlying language data available from our macroVS1 data feed see past the noise of the news cycle. They literally connect the dots faster and better relative to those that only rely on the echo chamber.

Headline risk is a growing threat, routinely throwing markets into a tailspin. Our data is the solution. Our clients will be neither surprised nor panicked regarding any of the decisions made over the coming weeks. They have capitalized on the ability to capture policy signals in advance, adjusting their positions accordingly.

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