One day before the release of the US Federal Reserve minutes, on February 22, Wells Fargo issued a floater capped call structure linked to the US CPI Urban Consumers NSA inflation. The Capped Fixed to Floating Rate Notes - US CPI Urban Consumers NSA (95000N2D0) is a 10-year registered note that offers a fixed monthly coupon of 3% in the first two years, and a monthly inflation-linked coupon until maturity, floored at 1% and capped at 5%.
Inflation is gradually returning to the US, both measured by the core and headline figures, according to Ricardo Santos, an economist at Applied Global Macro Research. "However, the biggest driver is neither the current measures by the Fed or the president," said Santos. "As the economic recovery continues and the output gap is closing, the disinflationary pressures have receded and inflation is returning. It goes without saying that the non-standard monetary policy measures implemented by the Fed (zero rates, Quantitative Easing) played a big role."
For the first time since 2014, US inflation hit the Fed's 2% limit in December 2016. When looking into the 10-year inflation swap rate, the price of inflation appears to be below the headline figure for the first time since 2011. With headline inflation rising more than the 10-year average for inflation, investors in the note would receive the full benefit of rising prices. Investors also had the benefit of a floor at 1%, while also having their capital secured against an up to 5% rise in inflation.
According to Santos, it is still too early to know the effect of the Trump administration, given the number of new measures and announcements. "However, one thing seems clear: typically, with the rise of protectionism - either through tariffs or effective trade barriers - consumers are the ones who pay the price, ie. inflation will rise," said Santos.
In the last year, the core US Consumer Price Index (CPI) and headline CPI have gradually increased, and are higher than they have been in recent years, mainly supported by this year's energy price rally and the recent rise in food prices. In February, core CPI recorded an annualised rate of 2.2% and a 3.0% rate over the past three months, the fastest movement since January 2008.Over the same period, headline CPI reached 2.7%, the highest rate since March 2012. In such an environment, the Fed Open Market Committee (FOMC) acted in line with its long-term strategy, to maintain moderate interest rates and inflation at 2%, as measured by the annual change in the price index for personal consumption expenditures (PCE). The March FOMC meeting confirmed the 2017 and 2018 inflation calls at 1.9% and 2.0%, respectively.
Overall, 103 structured products worth $1.16bn have been marketed in the US since 2010, with issuance reaching a peak in 2011, when $677m was raised from 55 products, according to SRP data. There were no inflation linked products in 2016.
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