US CPI Report to Mark a Turning Point for Equity Markets and Inflation Expectations
Starting today, markets will be receiving key data points to corroborate their view of price dynamics having turned the corner for good. The University of Michigan Consumer confidence survey and its survey inflation expectation will be the first of many, culminating in Tuesday’s CPI release.
In the days ahead, traders and economists will be paying close attention to the US Consumer Price Index (CPI) report. The report, set to be released at 8:30ET (13:30 GMT) on Tuesday, is expected to show a slight pick-up on the 1Y inflation expectations horizon. This report may signify a shift in the stock market's anticipation of inflation and interest rates, with possible wide-reaching consequences.
The Federal Reserve, meanwhile, wants to see inflation fall closer to its 2% target before waving the “mission accomplished” flag, and this CPI report marks a critical checkpoint along the way. On Tuesday, Japan’s government is expected to officially name Kazuo Ueda as the Bank of Japan's governor-designate, after news of Deputy Governor Masayoshi Amamiya's refusal of the position had been reported.
Yesterday's session saw a remarkable change in the market, with the US Treasury curve inverting to an all-time low of -87bp. It appears that the Federal Reserve's messaging has been successful in tandem with the positive economic data. In the process of adjusting their policy, the market senses that there is potential for more restriction in the near future, however, Powell has indicated that deflationary trends are in effect for the long run.
In the eurozone, the German inflation data came as a delayed reminder that the ECB is facing a longer fight against inflation. The most recent European Central Bank gathering and its following communication had only achieved a limited level of success in conveying its hawkish message to markets. This may explain why certain members of the European Central Bank, who are typically hawkish, have recently returned to discussing the balance sheet, after a brief hiatus.
Yesterday's 30-year Treasury sale did not live up to the high standards that have been set in the markets since the beginning of 2023, resulting in a below-average result. The drop in rates that follows should serve as a warning about current price levels.
0. “Rates Spark: Putting Disinflation To The Test” MENAFN.COM, 10 Feb. 2023, https://menafn.com/1105554357/Rates-Spark-Putting-Disinflation-To-The-Test
1. “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
2. “US CPI Preview: Disinflation Has Begun, But Will It Be Fast Enough for Fed?” Action Forex, 10 Feb. 2023, https://www.actionforex.com/contributors/fundamental-analysis/485848-us-cpi-preview-disinflation-has-begun-but-will-it-be-fast-enough-for-fed/
3. “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
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