US CPI Release: A Crucial Checkpoint for Disinflation Narrative
By With the University of Michigan Consumer confidence survey and its survey inflation expectation kicking off the data-filled week, markets are eagerly awaiting the US Consumer Price Index (CPI) release on Tuesday, February 14th at 13.30 GMT.[0] The report will be heavily scrutinized as it will mark a crucial checkpoint for the Fed's disinflation narrative.
Economists expect headline CPI to increase 0.5% month-over-month and 6.2% year-over-year, while core CPI is expected to rise 0.4% month-over-month and 5.7% year-over-year.[1] This would mark a slowdown in the year-over-year rate to 6.2% from 6.5% in December, and the core CPI to 5.4% from 5.7%.[2]
Since the beginning of 2023, the market has seen a tremendous increase due to the anticipation of lower inflation and potential monetary easing from the Federal Reserve.[3] A surprise inflation uptick in the US could add pressure on authorities to extend their most aggressive tightening cycle in two decades, shattering market hopes and potentially causing a significant market reversal.[1]
Meanwhile, the European Central Bank balance sheet is featuring in officials' communication again of late, but with limited effect so far.[4] Yesterday's market session was marked by another record low in the inversion of the US Treasury curve, reaching -87bp.[5] We are inclined to read this as the Fed’s latest messaging working as intended in combination with the stronger data, suggesting that some more tightening may be possible near term.[5]
Yet, today's survey is actually anticipated to show a small uptick on the 1Y inflation expectations horizon, and the consensus is that headline inflation will further drop from 6.5% to 6.2% year-on-year, while core inflation is seen at a higher 0.4%.[5] In hindsight, some market unease about what lies ahead in coming days combined with how far relative valuations had evolved can explain the soft 30Y auction result that triggered a correction in rates last night, lifting yields temporarily by 8bp.[5]
The upcoming US CPI report will be a critical checkpoint in the disinflation narrative and could have far-reaching implications. Markets will be closely monitoring the release to see if this is the turning point in the equity market's expectations for inflation and interest rates.[3]
0. “Inflation data will test ‘disinflation' optimism: What to know this week” Yahoo News, 12 Feb. 2023, https://news.yahoo.com/stock-market-week-ahead-consumer-price-index-inflation-retail-sales-172419890.html
1. “US Consumer Prices May Show Fed Has More Work to Do” Yahoo! Voices, 11 Feb. 2023, https://www.yahoo.com/now/us-consumer-prices-may-show-210000157.html
2. “Inflation data rocked the stock market in 2022: Get ready for Tuesday's CPI reading” MarketWatch, 12 Feb. 2023, https://www.marketwatch.com/story/inflation-data-rocked-the-u-s-stock-market-in-2022-what-investors-need-to-know-about-tuesdays-reading-e6517631
3. “The January CPI Report Could Be A Massive Shock To The Market” Seeking Alpha, 12 Feb. 2023, https://seekingalpha.com/article/4577589-january-cpi-report-shock-market
4. “Rates spark: Putting disinflation to the test” FXStreet, 10 Feb. 2023, https://www.fxstreet.com/analysis/rates-spark-putting-disinflation-to-the-test-202302100910
5. “Rates Spark: Putting Disinflation To The Test” MENAFN.COM, 10 Feb. 2023, https://menafn.com/1105554357/Rates-Spark-Putting-Disinflation-To-The-Test
