US Disinflation Narrative to Face Crucial Test with Upcoming CPI Report
The US disinflation narrative will have to pass a crucial test over the coming days, starting with today's University of Michigan inflation expectations release and culminating in Tuesday's CPI report. In the eurozone, the European Central Bank balance sheet is featuring in officials' communication again of late, but for now with limited effect.
 It appears that the Federal Reserve's messaging has been effective, in light of the current, more robust data. In terms of adjusting the policy stance, it is possible that further tightening may occur in the short-term. However, the market has responded to Powell's suggestion that deflationary forces have already taken effect in the long-term.
Today's University of Michigan survey is anticipated to show a small uptick on the 1Y inflation expectations horizon. And next week, while the consensus is that headline inflation will further drop from 6.5% to 6.2% year-on-year and core to 5.5% from 5.7%, the month-on-month core reading is actually seen at a higher 0.4%. This month-on-month reading usually gives a better picture of current price developments.
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 from the lows of the day.
In the eurozone, the German inflation data came as a delayed reminder that the ECB is facing a longer fight against inflation. Some of the more hawkish ECB members have resorted to communication on the balance sheet again after some pause on this topic. Klaas Knot had kicked this off on Wednesday stating that stopping the reinvestments of the asset purchase portfolio should be the ultimate goal. Yesterday, the Bundesbank’s Nagel stepped up the game and called for a more ambitious roll off of the portfolio, arguing that the reductions would need to pick up speed.
It is anticipated that the February 14 Consumer Price Index (CPI) report will have a substantial adverse effect on the stock market. The report may signify a shift in the stock market's outlook for inflation and interest rates, which could have long-term consequences.
0. “Rates spark: Putting disinflation to the test” FXStreet, 10 Feb. 2023, https://www.fxstreet.com/analysis/rates-spark-putting-disinflation-to-the-test-202302100910
1. “Rates Spark: Putting Disinflation To The Test” MENAFN.COM, 10 Feb. 2023, https://menafn.com/1105554357/Rates-Spark-Putting-Disinflation-To-The-Test
2. “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
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