(Bloomberg) — Bond traders nudged their expectations for US inflation higher this week as US stocks advanced, signifying increased confidence in a soft landing for the economy after seven Federal Reserve rate increases.
Even with another central-bank rate increase expected next week, the so-called breakeven rate on five-year five-year forwards — a proxy for inflation expectations — has risen to about 2.3%, the highest since November, from a recent low on Jan. 18.
A similar gauge for 10-year inflation-linked bonds was up to 2.32% on Friday from 2.24% a week prior. It fell below 2.10%, the lowest level in nearly two years, on Jan. 18, the day before an auction of new securities that helped cheapen the market.
Month-end rebalancing of bond indexes to include the newly issued Treasury inflation-protected securities has the potential to drive demand for them, an additional factor for breakevens this week. Bloomberg Indices projected a larger-than-average 0.26-year increase in the duration of the US TIPS index.
Meanwhile, investors pulled a combined $490 million out of five major bond exchange-traded funds linked to inflation on Thursday, the largest such outflow since early December, according to data compiled by Bloomberg.
Economic indicators suggest price pressures are abating. University of Michigan survey respondents recently improved their US short- and long-term inflation expectations. Even the Fed’s preferred inflation measures eased in December to the slowest annual paces in over a year while consumer spending fell, according to data released on Friday.
While the economic data paves the way for policymakers to further scale back the pace of hikes, Fed officials have continued to warn against inflation that is still unacceptably higher than the central bank’s 2% target.
Read: Bond Traders Hedge Prospect That This May Be Fed’s Last Hike
The following is a series of indicators on how the market views US inflation.
Inflation News Bites
Christine Lagarde said the European Central Bank will do everything necessary to return inflation to its goal, pointing to more “significant” interest-rate increases at coming meetings.
Enjoying one of Italy’s classic dishes has just become noticeably more expensive, with the average cost of cooking a Pizza Margherita up almost 30% in December from year ago.
Australian inflation accelerated to the fastest pace in 32 years in the final three months of 2022, exceeding forecasts and prompting money markets to price in an interest-rate hike at next month’s central bank meeting.
Singapore’s core inflation, the gauge closely-watched by the central bank, held steady near a 14-year high in December as policymakers turn attention to economic growth risks amid a bleak global outlook.
UK factories’ fuel and raw material costs are rising at their slowest pace in almost a year, further evidence that pipeline inflationary pressures are easing.
Key Upcoming US Releases
Feb. 1: Federal Open Market Committee policy decision
Feb. 3: Monthly jobs report, including average wages data, for January
Feb. 10: University of Michigan inflation expectations gauges for February (preliminary)
Feb. 14: Consumer Price Index for January
Feb. 16: Producer Price Index for January
Feb. 17: Import and Export Price Indexes for January
Feb. 23: GDP report for fourth quarter (second reading)
Feb. 24: Personal income and spending report for January
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