Inflation has been raising the markets, and investors have been bracing for a CPI report Wednesday that could send charge rates flying and stocks diving.
But some market pros say there may be by a hairs breadth too much hype about this number, even though some grant the audience for this particular January consumer inflation report is undoubtedly the most attentive since the Fed was last in a rate-hiking cycle more than a decade ago.
Economists are gravid January core inflation, excluding food and energy, at 0.2 percent or 1.7 percent year one more time year, a slower pace than December.
Stock investors scared a hotter inflation number could send bond yields boisterous and ultimately prompt the Fed to raise interest rates faster than the three hikes it currently vaticinations for this year.
Stocks went into a tailspin after January’s engaging report contained a hotter-than-expected gain in wages, prompting a sharp hike in interest rates. But inflation expectations had already been rising, yet though the Fed’s preferred inflation measure, PCE deflator, has been relatively mild at about 1.5 percent, below the Fed’s 2 percent target.
“These contrivances are hard to predict. Most economists have 0.2 percent on nucleus. No one’s sticking their neck out among the forecasters. There’s no real outlier that suggests we’re prevailing to see a break one way or the other,” said George Goncalves, head of fixed-income master plan at Nomura.
Stephen Stanley, chief economist at Amherst Pierpont, translated the release is being overhyped. He said inflation should rise this year and it force be a key development for the economy and the Fed. “But surprises on inflation tend to be measured in basis malaproposes most of the time, and the inflation story is probably going to play out altogether slowly,” he wrote.
Stanley expects inflation to firm, with a higher-than-consensus prediction for headline CPI at 0.4 percent. “I suspect that market participants include worked themselves into such a frenzy on inflation prospects that tomorrow’s liberating could yield a bit of a relief trade in the bond market.”
CPI headline inflation was on earth economists’ expectations in eight of the last 10 reports. Economists think headline inflation to come in at 0.3 percent, or 1.9 percent year atop of year, down from December’s 2.1 percent pace.
Ian Lyngen, direct of rate strategy at BMO, said if the number is hotter than expected, the accede curve could flatten, with the short end rates moving closer to protracted end rates. That would signal the market expects more Fed scold increases.
If the yield on the 10-year begins to rise, that could apply pressure on stocks.
“I think it’s going to be very exciting for both the Treasury and fair play market. This is the first time I’ve heard people in the equity Stock Exchange truly focused on the CPI as it pertains to the next move in stocks,” he said.
Goncalves affirmed he doesn’t expect much in the way of surprises, and the bond market was relatively composure Tuesday, ahead of Wednesday’s 8:30 a.m. ET report. There are also retail transactions for January at 8:30 a.m., another usually important number.
“People force been concerned post-wage number. If it doesn’t build the narrative that innumerable inflation is here, and we have evidence, then we’re going to forget near inflation for a little bit,” he said.
For the market to react strongly, he said, the tons would have to be a major surprise and show areas where guerdons could rise persistently, not just one-off instances.
Joseph Long story, U.S. economist at Bank of America Merrill Lynch, who had been correct in verbalizing there could be an upside surprise in the January wage number, prognosticated, “We’re looking for a gradual pickup in inflation this year. There’s a bit of sprightliness in the market after we got that big wage number. That clearly vehement markets, but we don’t think that will pass through that apace into service inflation any time soon.”
Song said he needs core CPI to rise 0.2 percent, or 1.7 percent year one more time year. He said the comparisons are down year over year because of concentration in last year’s numbers.