Home Business Bond Traders’ Inflation Outlook Cooled in ’22 for First Time in Years

Bond Traders’ Inflation Outlook Cooled in ’22 for First Time in Years

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(Bloomberg) — Bond traders have pulled back, over the course of this year, on their expectation for where US inflation will be in a decade, suggesting growing confidence that 2022’s consumer-price blowout is under control. 

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With economic data showing signs that the series of supersized interest-rate increases from the Federal Reserve is beginning to have an effect on price pressures, market indicators are showing an annual pullback in traders’ inflation perceptions for the first time in at least two years. 

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The so-called breakeven rate on five-year five-year forwards — a widely watched proxy for the market outlook — has fallen 9 basis points to around 2.18% since last December. While that’s still above the 2% pace that the Fed tries to target for actual inflation, it’s the first annual decline in that measure since 2019. A similar gauge for Treasury Inflation Protected Securities, meanwhile, is down year-on-year for the first time since 2018.

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Of course, for much of this year it did not look so benign. The five-year five-year measure, at one point, spiked to almost 2.7% amid fears that inflation would remain persistent as the energy shock from the Russia-Ukraine war turbocharged concern. That helped steel the Fed’s resolve to tighten policy, which has in turn lifted market interest rates across the spectrum — both nominal and real.

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

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

Inflation Snapshot

Inflation News Bites

  • Wholesale power prices surged 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 once the bills get mailed out.
  • US short-term inflation expectations fell further at the end of the year and consumer sentiment improved, according to a University of Michigan survey, reflecting easing price pressures and relief at the gas pump.
  • Spanish inflation slowed for a fifth straight month in December, decelerating by nearly 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 a deeper slump may now be underway.

Key Upcoming US Releases

  • Jan. 6: Monthly jobs report, including average wages data, for December
  • Jan. 12: Consumer Price Index for December
  • Jan. 13: Import and Export Price Indexes for December; University of Michigan inflation expectations gauges for January (preliminary)
  • Jan. 18: Producer Price Index for December
  • Jan. 26: GDP report, including PCE deflators, for fourth quarter (first reading)
  • Jan. 27: Personal income and spending report, including personal consumption expenditure gauges, for December
  • Feb. 1: Federal Open Market Committee policy decision

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