What’s After White House’s Alert On CPI?

Ahead of Thursday’s key US Consumer Price Index data scheduled for New York’s morning session, the White House says tomorrow’s inflation data will show a high year-on-year figure.

The White House states that its irrelevant month on month number will continue trending lower the rest of the year.

The consensus in the market for January CPI print is for a 0.4% MoM (7.2% YoY) lift in consumer prices. The Core inflation is expected to come in at 0.5% MoM (5.9% YoY).

The evidence from service prices and wages is that inflation pressures are broadening, while high energy prices continue to push the headline figure higher.

For markets, a rise in excess of 7.5% YoY is believed to be needed to ignite renewed short term volatility as that would reinforce the January labour market report in raising the debate around a 50bps lift-off hike in March.

Before the FOMC announces its decision, it will have the February labour market and CPI reports. The path of that data will be important in helping to shape the Fed’s assessment of inflation in early 2022, and the tone of its communications.

Following the White House’s expectations of a high inflation figure on YoY, comments by White House’s economic adviser Brian Deese attracted wide attention in the markets.

“Reaching agreement with the US Congress on a package of climate and social spending will be a challenge, but the Biden administration remains upbeat it can be done”, this has been one of Deese’s latest remarks. Deese believes that the US is seeing strong labour market recovery, about 60% of decline due to pandemic has been recovered. Deese also sees opportunity to make lot of progress on returning those not in labour force due to family care obligations.

Biden administration remains optimistic about getting something meaningful done with congress on climate, social spending package. Wednesday’s news headlines tried to pacify inflation fears but the pre-CPI mood in the market weighed on risk barometers like AUD/USD during the early hours of Thursday’s Asian session. The Australian dollar pauses three-day uptrend around 0.7180 by the press time.

There has been a gasp heard around the world last week when Christine Lagarde, president of the European Central Bank, talked about inflation. Lagarde is clearly concerned about inflation, just as the Federal Reserve policymakers.

With that in mind, market watchers will be particularly focused on Consumer Price Index data Thursday and other economic reports this week. Investors already expect CPI to be much hotter than the previous month, so none expects any real rattling of markets unless the data is above expectations.

Inflation could peak until the middle of 2022, so market choppiness related to central bank policy expectations could stick around. Investors are still focused on the prospect of rising interest rates, even as the yield on the 10-year Treasury note retreated from 27-month highs on Wednesday and all eyes will be on US consumer price data Thursday.

As interest rates for home loans follow benchmark US Treasury yields back to pre-pandemic levels, depleted supply of homes on the market – driven by a mad stampede for the suburbs in search of elbow room and home office space – has launched home prices into the stratosphere.

The rise in rates is taking a toll on homebuying affordability, which has been eroded by sharply higher home prices. Homebuyer demand remains fairly robust, with the purchase index – regarded as one of the more forward-looking housing market indicators, is down a mere 11.4% from the year ago buying frenzy.

But the stock market is an even more forward-looking indicator, providing a picture of where investors see housing shares six months to a year from now.

With major global central banks eyeing both quantitative tightening and interest rate hikes, investors are likely wondering whether the volatility seen in the first several weeks of 2022 will be the norm for the rest of the year. Central banks are simply removing the extra stimulus that was put in place to support economies during the depths of the pandemic; underlying fundamentals remain very solid and financial markets will realize this,” he told the Reuters Global Markets Forum.