Investors Look Positive as Short-Term Inflation Expectations Edge Lower

The New York Fed’s survey of 1-year-ahead inflation expectations continued to decline in December, dropping 0.2 percentage points to 5.0%, its lowest level since July 2021. Meanwhile, the 3-year-ahead inflation expectations remained unchanged at 3.0%, and inflation expectations for five years ahead rose by 0.1 percentage point to 2.4%.

The drop in short-term inflation expectations is a positive sign for the equity market as the Federal Reserve could slow down its pace on hiking interest rates.

The U.S. Bureau of Labor Statistics is expected to release December 2022 inflation data on Thursday as economists expected headline inflation at 6.6% over the past year, a slow down from 7.1% recorded in November. Meanwhile, core inflation that excludes volatile food and energy prices is expected to edge slightly higher, coming in at 5.7% on a yearly basis after a 6% increase in November.

Fed Chair Jerome Powell is scheduled to speak on Tuesday on the subject of central bank independence at a bank symposium in Sweden. Investors will closely monitor the Fed’s chair statement for hints of future rate hikes whether it be 25 or 50 basis points.