One slower inflation print may not yet mean the Fed will want to signal less tightening in sum
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.
