Marketmind: Disinflation station
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[December 12, 2023] A
look at the day ahead in U.S. and global markets from Mike Dolan
Tuesday's consumer price inflation update may not have to wow the
gallery to keep the U.S. disinflation glow alive and persuade the
Federal Reserve that its job is done.
With Fed policymakers starting their two-day meeting on Tuesday, the
November CPI release drops right on to the table in front of them.
On the face of it, there may be no great thud.
Annual headline inflation is expected to have slipped back to 3.1%, its
lowest since June, and the "core" rate, excluding food and energy, is
forecast to remain stuck at 4.0%
But economists say this seeming stasis may mask underlying disinflation
momentum. Deutsche Bank points out that if core CPI comes in with gains
of 0.3% over the month and 4.0% over the year, that would bring the
six-month annualised rate as low as 2.8% - the first sub-3% reading
since March 2021.
What's more, inflation expectations are ebbing, supply distortions
easing, oil prices are still falling year-on-year, used-car sales that
were a post-pandemic irritant are plummeting, and China is struggling
with persistent deflation.
After the University of Michigan's December household survey showed an
impressive retreat in inflation expectations last week, the New York
Fed's equivalent measure chimed on Monday - showing U.S. consumers'
one-year inflation outlook softening to 3.4%, its lowest in more than
two years.
Little surprise then perhaps that U.S. Treasuries are rallying into
Tuesday's big release - despite a sticky 10-year note auction on Monday.
Ten-year yields are down 4 basis points from Monday's close to trade
about 4.18% in European trade.
The long bond also rallied into Tuesday's key report, with yields
dropping 5bp ahead of a $21 billion auction of 30-year paper later in
the day - even though the most recent 30-year auction struggled badly.
However, the NY Fed's measure of so-called "term premium" demanded for
holding long-term bonds has fallen back over the past week to its most
negative since September.
The disinflation and "peak rates" picture and data showing U.S.
employment still in rude health spurred the S&P500 to new closing highs
for year on Monday - topping year-to-date gains of 20% for the first
time in 2023. Stocks futures held those gains ahead of the bell on
Tuesday.
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Traders work on the floor at the New York Stock Exchange (NYSE) in
New York City, U.S., December 11, 2023. REUTERS/Brendan McDermid
Asia and European bourses were firmer too - with MSCI's all-country
index hitting four-month highs.
The dollar was a touch lower.
Stoking the more positive price picture overseas, British wage
growth slowed by the most in almost two years -- good news for the
Bank of England ahead of its policy meeting on Thursday.
Even though annual oil price losses deepened amid mounting concern
over excess supply and slowing demand, spot prices held up after
news of an attack by Iran-aligned Houthis on a chemical tanker
stirred Middle East tensions.
China's markets were firmer too, meantime, as the country's leaders
started a closed-door meeting on Monday to discuss economic targets
and map out stimulus plans for 2024.
The annual Central Economic Work Conference, during which President
Xi Jinping and other top officials are expected to chart the course
for the world's second-largest economy next year. This is likely to
end on Tuesday.
The CSI 300 Real Estate Index jumped 4.2% as investors await fresh
policy support. China's Country Garden Holdings is likely to avoid
its first default on yuan bonds after most holders of a local note
agreed not to demand repayment this week, Bloomberg News reported.
Key developments that should provide more direction to U.S. markets
later on Tuesday:
* U.S. Nov consumer price index, Cleveland Fed CPI cut, Nov NFIB
small business survey, Federal Budget statement.
* Federal Reserve's Federal Open Market Committee starts 2-day
meeting
* U.S. Treasury auctions $21 billion of 30-year bonds
* U.S. corporate earnings: Johnson Controls, Frequency
Electronics, EMCORE, Champions Oncology, MamaMancini's
(By Mike Dolan, editing by Jane Merriman; mike.dolan@thomsonreuters.com)
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