Rates Spark: CPI pointers

The US October CPI will be today’s main flashpoint. The consensus is for headline inflation to slow to 7.9% and the core rate to ease to 6.5%. The main focus should be on the month-on-month core rate, which is seen ticking down to 0.5% from 0.6%. Mind you, readings closer to 0.2% is what would be needed to bring the rate closer to the Fed’s 2% target, so anything we will see today will still signal central bankers that they are wide off the mark.

Today will still signal to central bankers that they are wide of the mark

But coming in the wake of the Fed signalling the possibility of decelerating its tightening pace from December onwards, there is a good chance that markets will extrapolate this from today’s data. A reading in line with consensus should further strengthen expectations for a 50bp hike in December, which is what the market is currently leaning towards, with a 57bp increase discounted in the OIS forwards. The cautionary tale is that inflation data has had a habit of surprising with higher readings. Markets have been trading stronger going into today’s reading with 10Y Treasury yields dipping towards 4.05% yesterday, which could increase the impact of a disappointing inflation reading.

However, we have the feeling that the market may still be too absorbed with the notion of a potential pivot. There are good reasons to slow the pace of tightening not least given policy lags involved after a phase of catching up. That does not mean that the Fed will want to signal that it is doing less tightening in sum. This should not be the case unless there is more compelling evidence of inflation being on a trajectory to return to target.

The European Central Bank has shown its willingness to keep its hawkish stance even in light of growth risks. At the hawkish end, Belgium’s Pierre Wunsch stated the ECB may need to hike more than markets expect if the economic downturn remained mild. Such hawkish signalling might be motivated by real rates having failed to rebound from their late October slump.

The ECB’s consumer expectations survey contained little to cheer about for the ECB

To be sure, the ECB’s consumer expectations survey contained little to cheer about for the ECB and its efforts to tackle inflation. Near-term price expectations over the 12-month horizon increased a little to 5.1%, while longer run inflation expectations over the 3-year horizon remained unchanged at 3%. Uncertainty over the outlook remained elevated. At the same time expectations of economic growth deteriorated markedly.