PRIMER: US CPI data for October is due at 13:30GMT/08:30EST; the annual rates of inflation are seen easing, though there may be a pick-up in the monthly metric

EXPECTATIONS: Analysts expect headline consumer prices to pick up by 0.6% M/M in October, accelerating from the 0.4% M/M rate in September; the annual measure, however is seen paring to 8.0% Y/Y in October from 8.2%. The core measure is seen cooling a touch to 0.5% M/M, lower than the 0.6% M/M in September, but a still elevated level vs historical levels, while the annual core measure is seen easing a touch to 6.5% Y/Y from 6.6% in September. 

POLICY IMPLICATIONS: The data will be framed in the context of how much progress the Fed is making towards lowering inflation. After the November FOMC meeting, Fed Chair Powell said it was “very premature” to consider pausing or ending the rate hiking cycle, noting that inflation remains well above the Fed’s longer-run goals, with price pressures evident across goods and services. Although longer-term inflation expectations still appear well-anchored, the Fed wants to see inflation coming down decisively, and is prepared to stay the course until the job is done. The message from Powell was that the Fed is strongly committed to its inflation target of 2%. He did, however, allude to a potentially slower pace of rate hikes in December; the statement said the Fed will consider the “cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments” when determining the pace of future rate increases. Analysts rationalised that with rates in restrictive territory, the Fed can downshift to a slower pace of normalisation to assess the impact of the 375bps worth of rate tightening unleashed since March.

MARKET PRICING: Currently, the market is split in its views about whether the Fed will implement a 50bps or 75bps rate hike in December. Accordingly, the market seems to be of the view that if inflation metrics move lower (and traders are keeping an eye on aggregate inflation data, including CPI, PCE, wages metrics within jobs data, consumer inflation expectations via surveys, etc), it will give the Fed cover to downshift to the lower increment; however, if inflation data does not cooperate, then the Fed will prefer the larger sized hike, and potentially an even a higher terminal rate (Powell suggested that the eventual peak Fed Funds Rate Target is above the 4.6% pencilled in within the September projections; money markets see the peak at 5.00-5.25% in Q2 2023).

OTHER DATA: Analysts note that there is another CPI report and another jobs report due before the December FOMC, suggesting today will not be the final piece of the puzzle in setting the tone for that end of year confab. This may also be reflected in the Fedspeak which follows the CPI data; Harker (2023), Logan (2023), Daly (2024), Mester (2022), George (2022), Williams (voter) are all on the docket to give remarks in wake of the US CPI data.

10 Nov 2022 - 08:36- Fixed IncomeData- Source: Newsquawk