Traders are focused on the upcoming US consumer price data this Thursday, but the inflation data due out a day later could be even more important in determining the short-term outlook for global markets.
While the expected fall in the consumer price index is likely to be welcomed by investors, Friday's 5 to 10-year inflation expectations from the University of Michigan will resonate with Fed officials who fear a further increase in prices. The index rebounded to 2.9% in October, so another gain could put pressure on the bank and force it to raise rates even higher than expected. That would reduce risk appetite, from equities to bonds.
On Thursday, Richmond Fed President Thomas Barkin vowed that the central bank would not back down from a slow return to normal inflation levels, which could threaten the stability of inflation expectations.
US yields could rise if the consumer price index is in line with forecasts. 5-10 year inflation expectations may surge to the highest since 2011, said Prashant Nyunaha, a senior rate strategist at TD Securities.
A decline in the expected consumer price index should not provoke a significant market reaction, but retesting the January and June highs, according to the University of Michigan, will confirm that the rate hike to date has not had the expected impact on inflation.