Marketmind: Disinflation station

A look at the day ahead in U.S. and global markets from Mike Dolan

Tuesday's consumer price inflation update may not have to wow the gallery to keep the U.S. disinflation glow alive and persuade the Federal Reserve that its job is done.

With Fed policymakers starting their two-day meeting on Tuesday, the November CPI release drops right on to the table in front of them.

On the face of it, there may be no great thud.

Annual headline inflation is expected to have slipped back to 3.1%, its lowest since June, and the "core" rate, excluding food and energy, is forecast to remain stuck at 4.0%

But economists say this seeming stasis may mask underlying disinflation momentum. Deutsche Bank points out that if core CPI comes in with gains of 0.3% over the month and 4.0% over the year, that would bring the six-month annualised rate as low as 2.8% - the first sub-3% reading since March 2021.

What's more, inflation expectations are ebbing, supply distortions easing, oil prices are still falling year-on-year, used-car sales that were a post-pandemic irritant are plummeting, and China is struggling with persistent deflation.

After the University of Michigan's December household survey showed an impressive retreat in inflation expectations last week, the New York Fed's equivalent measure chimed on Monday - showing U.S. consumers' one-year inflation outlook softening to 3.4%, its lowest in more than two years.

Little surprise then perhaps that U.S. Treasuries are rallying into Tuesday's big release - despite a sticky 10-year note auction on Monday.

Ten-year yields are down 4 basis points from Monday's close to trade about 4.18% in European trade.

The long bond also rallied into Tuesday's key report, with yields dropping 5bp ahead of a $21 billion auction of 30-year paper later in the day - even though the most recent 30-year auction struggled badly.

However, the NY Fed's measure of so-called "term premium" demanded for holding long-term bonds has fallen back over the past week to its most negative since September.