How much inflation?

Hopes for Disinflation... Overinflated?

About that disinflation...inflation might not be falling as quickly as hoped. US consumer prices rose in December instead of falling as previously thought, revised government data showed on Friday. CPI edged up 0.1% in December rather than dipping 0.1%, whilst November’s CPI was also revised up to +0.2% instead 0.1% as previously recorded. It’s all to do with recalculating seasonal adjustment factors, which is used to strip out seasonal fluctuations. Core CPI rose 0.4% in December, instead of 0.3% as previously indicated, with November revised to +0.3% from +0.2%. If the market thinks inflation is coming down, then any print that points in the opposite direction will have a very severe disruptive effect on equity prices, as well as bonds. That’s the new data-dependent Fed.

Tomorrow's CPI Print to Impact Market

This all makes tomorrow’s CPI print all the more important for the market. Core inflation is expected to decline to 5.4% from 5.7%, with persistently high rents preventing a bigger drop. Interesting question – do higher rates make rents higher? High rates make it harder to buy, driving up demand in the private rental sector, pushing up rents...the exact opposite of what’s meant to happen. Remember the Fed has ditched full gremlin mode and is now data dependent. As BofA notes: "So market dependent on Fed. And Fed dependent on data. And data dependent on economy that market & Fed have found impossible to forecast."

Stocks Start the Week Slow

Stocks are not doing much in early trading on Monday with the CPI release in firm focus. There were small gains in London, Paris and Frankfurt despite losses in Tokyo and a flat session in Hong Kong. Wall Street eked out a narrow gain on Friday but still posted its worst week since December as investors started to reassess where the Fed goes next. The 10yr Treasury yield is at its highest in over a month. ECB Governing Council member Mario Centeno and Fed Governor Michelle Bowman are speaking later today. BofA: "Stay negative on European equities... our base case remains a sharp weakening in growth, translating into rising risk premia and falling earnings expectations... These assumptions are consistent with 20% downside for the Stoxx 600 to 365 by Q3.”

Oil Still Uncertain

Oil retreated as growth worries and concerns about the Federal Reserve hiking interest rates for an extended period offset the gains made last week after Russia announced its plan to cut its oil output by 500,000 barrels per day. The WTI futures fell to $79, after having risen by $8 last week. This reflects the ongoing debate between the potential benefits of China's reopening and the potential drawbacks of the Fed's interest rate hikes causing a hard landing in the economy.

More Hawks Despite Rising Market Sentiment

ECB board member Isabel Schnabel sent out a hawkish message on Friday, arguing that rates would need to rise significantly to beat inflation. "Broad disinflation has not started in the euro area," Schnabel said. "Rates must reach a sufficiently restrictive level ... (and) we’ll keep rates high until we see robust evidence that underlying inflation returns to our target." Meanwhile the euro is testing the 200-day line.