Rates Spark: Putting Disinflation to the Test[0]
Chairman Powell and the Federal Reserve’s central bankers have been vocal in recent weeks about the start of the “disinflation process”; however, they are not finished with their tasks yet.[1] Before the central bank can be satisfied that its 2% inflation target has been achieved, this CPI report is a key milestone.[1] In the days ahead, markets will receive some crucial data points to put their disinflation narrative for the US to the test.[2]
Beginning with the University of Michigan Consumer Confidence Survey and its survey of inflation expectations today, culminating in the Consumer Price Index (CPI) release on Tuesday, markets will be furnished with critical pieces of data that will back up their idea that price movements have stabilized permanently.[3] It is expected that the current survey will show a slight increase in inflation expectations for the next year.[3] 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% – and keep in mind it is the month-on-month that usually gives a better picture of current price developments.[3]
Yesterday the US Treasury curve saw a noteworthy development as it inverted further, hitting a new low of -87bp.[3] It appears that the Federal Reserve’s latest messaging is having its intended impact combined with the more positive data.[3] In regards to adjusting the policy, there could be additional tightening in the short-term, but the market paid special attention to Powell’s indication that deflationary forces are already in motion for the long-term outlook.[3]
The German inflation data in the eurozone served as a reminder that the European Central Bank (ECB) will have a tougher battle against inflation for a more extended period.[3] The effects of the most recent ECB meeting and its subsequent communications had only been limitedly successful in conveying the hawkish message to markets.[3] This could explain why certain hawkish members of the ECB have recently gone back to speaking about the balance sheet after not doing so for a period of time.[3]
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. “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/
2. “Rates Spark: Putting disinflation to the test” ING Think, 10 Feb. 2023, https://think.ing.com/articles/rates-spark-disinflation-to-the-test/
3. “Rates Spark: Putting Disinflation To The Test” MENAFN.COM, 10 Feb. 2023, https://menafn.com/1105554357/Rates-Spark-Putting-Disinflation-To-The-Test