Traders Are Paring Back Long-Term US Inflation Expectations

Expectations for longer-term US inflation are moderating from a recent peak as the bond market sees slowing economic data as a signal that the Federal Reserve will soon end its interest-rate hikes.

(Bloomberg) — Expectations for longer-term US inflation are moderating from a recent peak as the bond market sees slowing economic data as a signal that the Federal Reserve will soon end its interest-rate hikes.

The so-called breakeven rate on five-year five-year forwards, an indicator of future inflation pressure, eased below 2.3% this week — compared to a peak of more than 2.5% about a month ago, according to data compiled by Bloomberg.

The gauge, which is measured by a five year swap that starts in 2028, smooths out near-term drivers of inflation such as commodity-price spikes, offering a clearer view on long-term expectations. For the past year, it’s averaged around 2.25%.

A string of recent US data releases, though, have surprised to the downside, with moderating jobs growth and inflation pressure. In bond markets, that’s led to greater confidence that Fed officials will leave their interest-rate policy band steady at 5.25% to 5.5% when they meet in September.

Interest-rate swaps imply a less than a 50% chance of a quarter-point hike later this year, while rate cuts are being priced to arrive as early as May 2024. Traders are still watching for fresh consumer price inflation data ahead of the Fed’s next meeting.

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

Inflation Snapshot

Inflation News Bites

The Federal Reserve’s preferred measure of underlying inflation posted the smallest back-to-back increases since late 2020.
The world’s biggest rate cuts are Chile’s prize for taming inflation.
The slowest increase in grocery bills in almost a year drove down inflation in British shops in August.
Japan gets a positive inflation signal as demand outstrips supply, in a signal the country is getting closer to achieving the lasting inflation sought by its central bank.
Swiss inflation holds below 2% in last take before SNB decision on whether or not to raise borrowing costs.
Inflation slowed less than expected in Germany and quickened in Spain, offering European Central Bank officials a partial picture of the region’s price pressures

Key Upcoming US Releases

Sept. 13: CPI report; real average hourly and weekly earnings
Sept. 14: PPI report
Sept. 15: Import prices
Sept. 20: Federal Open Market Committee interest rate decision
Sept. 28: GDP price index
Sept. 29: Personal income and spending report, including PCE, for August; University of Michigan survey of inflation expectations
Oct. 6: Non-farm payrolls, including hourly earnings and unemployment rate
Oct. 11: PPI report
Oct. 12: CPI report; real average hourly and weekly earnings
Oct. 13: Import prices; University of Michigan survey of inflation expectations

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