Marketmind: Disinflation station

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 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.

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 (NYSE:), Frequency

Electronics, EMCORE, Champions Oncology (NASDAQ:), MamaMancini’s

(By Mike Dolan, editing by Jane Merriman; [email protected])