(Bloomberg) – Bond traders pushed their expectations for US inflation higher this week as US equities progressed, signaling more confidence in a soft landing for the economy following seven rate hikes from the Federal Reserve.
Even with another central bank rate hike expected next week, so-called break-even rates on five-year five-year forward contracts – a measure of inflation expectations – have risen to about 2.3%, the highest since November, from a recent low. on January 18.
A similar gauge for 10-year inflation-linked bonds rose to 2.32% on Friday, up from 2.24% a week earlier. It fell below 2.10%, its lowest level in nearly two years, on Jan. 18, the day before an auction of new securities that helped cheapen the market.
Rebalancing bond indices at the end of the month to include Treasury’s newly issued inflation-protected securities may boost demand for them, adding another factor to break-evens this week. Bloomberg Indices forecast an above average 0.26 year increase in the duration of the US TIPS index.
Meanwhile, investors collectively pulled $490 million from five major exchange-traded inflation-linked bond funds on Thursday, the largest such outflow since early December, according to data compiled by Bloomberg.
Economic indicators suggest that price pressures are easing. University of Michigan survey respondents recently improved their short- and long-term inflation expectations in the US. Even the Fed’s preferred inflation measures eased in December to the slowest annual rate in more than a year as consumer spending fell, according to data released Friday.
As the economic data paves the way for policymakers to further scale back the pace of rate hikes, Fed officials continue to warn of inflation still unacceptably above the central bank’s 2% target.
Read: Bond Traders Hedge the Prospect That This Could Be the Fed’s Last Rise
The following is a series of indicators on how the market views US inflation.
Snapshot of inflation
Inflation News Bites
- Christine Lagarde said the European Central Bank will do whatever it takes to bring inflation back to its target, pointing to more “significant” rate hikes in upcoming meetings.
- Enjoying one of Italy’s classic dishes just got noticeably more expensive, with the average cost to cook a pizza Margherita up nearly 30% in December from a year ago.
- Australian inflation accelerated to its fastest pace in 32 years in the final three months of 2022, beating forecasts and prompting money markets to price in a rate hike at next month’s central bank meeting.
- Singapore’s core inflation, the measure closely watched by the central bank, held steady in December near its highest level in 14 years as policymakers focused on economic growth risks amid bleak global prospects.
- UK factories’ fuel and raw material costs are rising at their slowest pace in nearly a year, further evidence that pipeline inflationary pressures are easing.
Top upcoming US releases
- February 1: Federal Open Market Committee policy decision
- February 3: Monthly jobs report, including median wage data, for January
- February 10: University of Michigan inflation expectations for February (tentative)
- February 14: Consumer Price Index for January
- February 16: Producer Price Index for January
- February 17: Import and export price indexes for January
- February 23: Fourth Quarter GDP Report (Second Reading)
- February 24: Personal income and expense report for January
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