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Morning Bid: Not so fast

Published 12/22/2022, 06:11 AM
Updated 12/22/2022, 06:16 AM
© Reuters. A trader works on the trading floor at the New York Stock Exchange (NYSE) in New York City, U.S., December 14, 2022. REUTERS/Andrew Kelly

A look at the day ahead in U.S. and global markets from Amanda Cooper.

Ding dong, inflation's dead! Or so you might think looking at what consumers reckon will happen to price pressures over the coming year. Wednesday's confidence survey showed people see inflation gradually easing in the next 12 months and perhaps rightly so.

Gas prices have retreated to far more normal levels around $3.00 per gallon, from June's $5-plus heights; food prices are gradually moderating, just in time for the holiday season; and, even though the housing market is still roaring, there's been a little respite for Americans' squeezed finances.

The Federal Reserve keeps declaring its intention to fight inflation with both barrels, which inevitably means more rate hikes. But the market's not buying it.

Despite Fed officials touting 5% at least as the rate we need to get to, money markets show traders don't expect to see more than a couple of rate rises more at best, with rates topping out at around 4.8% in the spring.

Market-based inflation expectations show that on a five-year horizon, investors see inflation back at around 2.3%, whereas back in the summer, that rate was closer to 3.5%.

A final reading of the Fed's favourite measure of inflation - the core Personal Consumption and Expenditure index - is expected to show price pressures accelerated at a rate of 4.6% in the third quarter, in line with a second reading from late November. Sure, it's down from the 4.7% in Q2 and it's the third and final reading of what happened months ago now.

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But at 4.6%, it's still more than twice the central bank's 2% target and there might be more than one quiet "I told you so" heard around Washington later on.

A look at the data shows consumers have typically been a lot more pessimistic about inflation than they've needed to be. Until late 2021, one-year inflation expectations, as measured by the University of Michigan - a final reading for this month is due Friday - have drastically undershot actual annual changes in the consumer price index (CPI).

But they haven't been this out of whack in 20 years. Headline CPI rose at a rate of 7.1% in November. Consumers surveyed by U-Mich pollsters a year ago expected 4.9%.

Granted, no one could have foreseen the scale of the increase in inflation as a result of the world reopening after COVID-19 and Russia's invasion of Ukraine that so badly disrupted global flows of basics like food and fuel.

Inflation may have peaked, but it's not gone away, no matter how much consumers wish it would.

Key developments that should provide more direction to U.S. markets later on Thursday:

* U.S. Q3 final GDP

* U.S. Q3 final core PCE

* Initial weekly jobless claims

* Treasury auctions 5-Year TIPS

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