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. 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. 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%.
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. 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.
Meanwhile, the European Central Bank balance sheet is featuring in officials' communication again of late, but with limited effect so far. Yesterday's market session was marked by another record low in the inversion of the US Treasury curve, reaching -87bp. 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.
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%. 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.
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.
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