Today at 17:00 MSK, the University of Michigan's preliminary consumer survey will be released. The market will look not only at the overall sentiment index, but primarily at American households' inflation expectations. In September, year-ahead expectations had already risen noticeably.
What the previous survey showed
One-year inflation expectations rose to 4.6% versus 4.0% in August. Five-year expectations rose to 3.4% versus 3.3% a month earlier. These two lines are especially important for the market right now. The short-term indicator shows what consumers expect from prices over the coming year. The long-term one reflects how firmly high inflation is becoming entrenched in expectations.
What this survey is
The University of Michigan surveys American households monthly about their financial situation, the state of the economy, and their expectations for prices. The release comes out at 17:00 MSK. This is not actual inflation, but consumer expectations. But such expectations matter for the Fed, since they can influence wages, spending, and business behavior.
Why the market is watching the numbers especially closely right now
Oil has risen noticeably in price again. Rising energy prices can quickly feed into consumer expectations, since gasoline and energy are directly visible in everyday expenses. So the first question is whether year-ahead expectations will continue to rise. The second question is even more important - what will happen to the five-year indicator. If it continues to climb, that could mean high inflation is starting to become entrenched in long-term expectations.
Why this matters for the Fed
The Fed seeks not only to bring actual inflation back to target, but also to keep long-term expectations relatively stable. If consumers begin to expect high inflation for many years, that complicates the regulator's task. Then companies may raise prices more aggressively, and workers may demand higher wage growth. Such a mechanism can keep inflation elevated for longer.
How markets may react
If inflation expectations come in above September's readings, pressure on the bond market may intensify. US Treasury yields could move higher. The dollar, in that case, may receive additional support. For gold, rising yields and a stronger dollar usually create pressure.
Two scenarios
Scenario A: inflation expectations rise again. In that case, a quick impulse in DXY, Treasury yields, and gold is possible. The market may once again start pricing in a more hawkish Fed policy more actively.
Scenario B: the readings remain unchanged or decline. Then the reaction may quickly fade, and attention will shift to actual US inflation data.
What's next
A single consumer survey by itself rarely changes the whole picture on the Fed rate. Household expectations and actual inflation are different indicators. But if the rise in inflation expectations repeats for several months in a row, its significance for the market increases. The next full-fledged test will be US inflation data next week.
Do you trade the first minutes after the release?
The first minutes after the data comes out can produce sharp moves in the dollar, gold, and indices. For a prop trader, the rules of the specific program are especially important here. Some companies restrict trading immediately before an important release, while others allow such trades, and the conditions on leverage and daily drawdown may differ. Such parameters are best checked before the data comes out.