(Bloomberg) — Investors are bracing for key inflation data next week that could rattle the bond-market’s path.
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Consumer prices rose for the first time in three months in January, even as the annual inflation rate declined further, a report from the Labor Department is expected to show Tuesday.
The reversal would come on the heels of January’s jobs data, which broke bonds since then. Later, Federal Reserve officials pointed out that the inflation battle is not over and that it may take a long time for the central bank to achieve price stability. It would also dash expectations that inflation would remain on a downward trend, a view that triggered a rally in Treasuries last month.
“There is a near-term risk that inflation does not fall as sharply as the market is expecting,” said Jimmy Chang, chief investment officer at the Rockefeller Global Family Office.
With some up-tick in CPI anticipated, the danger remains that the larger increase in the monthly measure will extend the sell-off in Treasuries. Swaps traders raised their outlook for the terminal funds rate to about 5.20%, which is slightly above the average forecast set by Fed officials at their December meeting.
That compared to earlier in the month when bets showed the Fed would fail to get its policy rate down even to 5%. Moving up the ante, interest rate options activity this week has been driven by traders betting on the central bank going beyond the peak forecast of 5% to 5.25% this year, which they made in December against a high of 6%. was made on
The pressure on central banks globally was underlined last week in Australia and Mexico, where stubborn inflationary pressures prompted sharp rate hikes and policy guidance.
Fed Chair Jerome Powell also struck a cautious tone this week, telling an audience in Washington: “If we continue to receive, for example, strong labor market reports or higher inflation reports, it may well be the case that We do more and raise rates higher than they cost. During another speech, Governor Christopher Waller said: “I’m prepared for a long fight to bring inflation down to our target.”
That kept pressure on Treasuries, with the two-year yield climbing above 4.5%, its highest level since late November and above last week’s low of 4.03%. The benchmark also climbed some 0.86% above the 10-year yield, marking the deepest curve inversion seen for the cycle. It shows that the prospect of a more aggressive Fed path is expected to eventually prop up the economy and bring down inflation, rewarding long-term Treasury holders.
“Jobs matter even more if people fail to see a sustained improvement in the CPI,” said Michael Kelly, global head of multi-assets at Pinebridge Investments. “CPI still matters. And we have gasoline ticking, used car ticking, and technical adjustments.
Kelly said that a strong “global economy and recent US payrolls data mean that overall it is very difficult to see a more meaningful decline in yields over the long term.”
Barclays US economist Pooja Sriram and colleagues say US core inflation accelerated last month amid a strong services sector and a pick-up in goods inflation. On Friday, he raised his Fed funds forecast – seeing the terminal rate landing in the 5.25%-5.5% range. The Fed’s current range is 4.5%-4.75%.
Barclays changes Fed forecast, sees 25 bp rate hike by June
On Friday, survey-based measures from the University of Michigan showed price expectations rose from 3.9% to 4.2% in the coming year, but remained well below levels seen in the first half of last year. Powell and other Fed officials have stressed the importance of inflation expectations several times over the past year — because consumers see higher prices tend to drive up the level of real inflation.
Even in a case where the CPI behaves slightly better, the possibility of more persistent inflationary pressures cannot be ruled out given tighter labor conditions, which are seen while maintaining stagnant wage growth. .
“The sources of inflation come from shortages such as we are seeing in labor at the moment,” said Matt Smith, investment director at London-based Ruffer LLP, and “wages will continue to rise”. Implied expectations on the yields on five- and 10-year Treasury inflation-protected securities rose this week to their highest level since early December. Smith said Rafter is positioned higher to long-dated breakeven as he expects the Fed to eventually be unable to reduce inflation to its price stability target of 2%.
In addition to the CPI data, a host of Fed officials are scheduled to speak in the upcoming week, including Fed Governor Michelle Bowman and New York Fed President John Williams.
what to watch
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economic data calendar
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February 14: NFIB Small Business Optimism; consumer price Index; actual average hourly earnings
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February 15: MBA mortgage applications; Retail Sales; Industrial Production; capacity utilization; business list; NAHB Housing Index; tic flows
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Feb 16: Producer Price Index; Unemployment allowance; building permits; housing starts; new york fed service business activity
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February 17: Import and Export Price Index; leading index
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federal reserve calendar
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February 13: Fed Governor Michelle Bowman
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February 14: Dallas Fed President Laurie Logan; Patrick Harker, President of the Philadelphia Fed; New York Fed President John Williams
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February 16: Cleveland Fed President Loretta Mester; St. Louis Fed President James Bullard; Fed Governor Lisa Cook
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February 17: Richmond Fed President Thomas Barkin; marksman
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Auction Calendar:
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February 13: 13- and 26-Week Bills
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February 14: 12-day CMB
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February 15: 17-week bills; 20 year bond
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February 16: 4- and 8-Week Bills, 30-Year Tips
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