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

By Mike Dolan, Editor-At-Large, Financial Industry and Financial Markets

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If investors were wondering why Federal Reserve rhetoric remains so doggedly hawkish, the latest U.S. consumer price inflation report on Tuesday will likely explain why.

According to consensus forecasts at least, U.S. headline inflation is expected to have retreated sharply again in October back toward midyear lows around 3.3%. A near 15% drop in retail gasoline prices since late September should help see to that.

But underlying ‘core’ inflation is expected to stay stickier at an unchanged annual rate of 4.1% last month and still more than twice the Fed’s target.

A street sign for Wall Street hangs in front of the New York Stock Exchange May 8, 2013. REUTERS/Lucas Jackson

There’s been more encouraging news on inflation expectations, however, with the New York Fed’s latest survey of household sentiment showing a one-year inflation outlook slipping to 3.6% last month and as low as 2.7% over five years.

But the Fed may want to hang tough long enough into a slowing economy to ensure that inflation is squeezed back to its 2% goal. Goldman Sachs, for example, reckons the hard part of the Fed’s fight is over but it may not start cutting rates until the fourth quarter of 2024.

Futures markets are still more optimistic – seeing the first quarter-point cut fully priced by July and 75 basis points of easing in total in the mix by the end of next year. The worrying state of U.S. small businesses will be seen in the NFIB report for October out later today.

Long-term investors think the Fed is just playing a holding game and ultimately the cooling economy will allow it to ease enough to make today’s juicy bond yields worth snapping up.

Bank of America’s latest monthly funds survey shows global asset managers holding their biggest overweight position in bonds since March 2009 – and some 61% think yields will be lower in 12 months’ time than they are now.

And perhaps the negative tilt on October core inflation going into today’s release leaves more room for a positive surprise. Ten-year U.S. Treasury yields hovered just above 4.60%, the dollar index was a touch softer and S&P500 futures were marginally positive ahead of the bell.

Although U.S. crude oil prices have backed up again in recent days, they remain 18% below September’s peak and year-on-year losses are running at almost 10%.