Bond traders’ inflation outlook cools in 2022 after years

Bond traders have backtracked, over the course of this year, on their expectation of where US inflation will be in a decade, suggesting growing confidence that the 2022 consumer price burst is under control.

As economic data shows signs that the series of giant interest rate hikes from the Federal Reserve is beginning to have an effect on price pressures, market indicators show a year-on-year retracement in inflation perceptions from traders for the first time in at least two years.

The so-called breakeven rate on five-year forward contracts, a widely watched gauge of the market’s outlook, has fallen 9 basis points to around 2.18% since last December. While that’s still above the 2% pace the Fed is trying to target for real inflation, it’s the first annual decline by that measure since 2019. Meanwhile, a similar gauge for Treasury inflation-protected securities has down year-over-year for the first time. time since 2018.

Of course, for much of this year it didn’t seem so benign. The five-year-old measure, at one point, shot up to nearly 2.7% amid fears that inflation would remain persistent as the energy impact of the Russia-Ukraine war fueled concerns. That helped strengthen the Fed’s determination to tighten policy, which in turn raised market interest rates across the spectrum, both nominal and real.

But with signs that Fed tightening, among other factors, could ultimately push the US into recession, the upward pressure on both rates and inflation expectations is now easing somewhat.

The following is a series of indicators on how the market views US inflation.

Inflation News Tidbits

  • Wholesale energy prices rose more than 6,000% in parts of the US during the worst of the recent brutal cold snap, a sign that Americans are likely to face significantly higher winter heating costs a time bills are mailed.
  • Near-term US inflation expectations fell further late in the year and consumer confidence improved, according to a University of Michigan survey, reflecting easing price pressures and easing in the gas station.
  • Spanish inflation slowed for the fifth straight month in December, slowing by almost half since mid-year as energy costs continue to decline in the euro zone’s fourth-largest economy.
  • UK house prices fell for a fourth month, adding to concerns that a deeper slide may now be underway.

Key Upcoming US Releases

  • January 6 – Monthly jobs report, including average wage data, for December
  • January 12: December Consumer Price Index
  • January 13: December import and export price indices; Indicators of inflation expectations from the University of Michigan for January (preliminary)
  • January 18: December Producer Price Index
  • January 26: GDP report, including PCE deflators, for the fourth quarter (first reading)
  • January 27: Personal income and expenses report, including indicators of personal consumption expenses, for December
  • February 1: Federal Open Market Committee policy decision

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