It has been a barren week on the economic data calendar to this point but it picks up on Thursday with the release of the US consumer price index report for December.
In my view, the market has largely moved on from the inflation debate and it's increasingly clear that we're back in a 2010s style world of low growth and low inflation. The market has certainly agreed in the past two months but there is still a big difference between a 2.5% inflation world and a 1.5% world; plus even the biggest deflationist would argue there are risks around sticky prices and wages.
What's expected:
- CPI y/y 3.2% vs 3.1% prior
- CPI m/m +0.2% vs +0.1% prior
The first spot I'll be watching is the headline m/m print. The consensus is +0.2% but if you dig into the estimates it's more like +0.24% with plenty of big names leaning to the high side, so risks are high that we see +0.3%. Similarly, there is a higher bias in the y/y number as well. Here are some of the big name banks to two decimals from the WSJ, note that it's this cohort that skews higher with small firms lower.
Now I don't think a 0.1 m/m miss on headline is going to matter for more than a few minutes because the Fed and the market are more focused on core.
The estimates:
- Core m/m +0.3% vs +0.3% prior
- Core y/y +3.8% vs +4.0% prior
There is evidence that progress on core inflation has stalled and you can see that with the estimate and prior. A series of +0.3% months isn't going to put the Fed on target. Now some of that is due to lagged components but the Fed's touted 'core services ex housing' number was +0.44% in November. That's not something that will quiet the hawks if repeated.
So for me, the focus will be squarely on those core numbers.
That said, I think any upside surprise will be faded by the market in about an hour because inflation is yesterday's news. If I'm wrong about that, we will see it first in the bond market. Many are arguing (including the old bond king) that yields have fallen too far, too fast and that 10s need to back up to 4.2%. Maybe this is the trigger?
