It’s inflation week in the US.

Inflation data week, I mean. Every week is inflation week. Because, for the nth time, prices for a lot of what American consumers buy have just experienced an acute and permanent reset.

The argument for “healthy” inflation rests on the idea that a very gradual increase in prices over time is a good thing. In nonspecific terms, you want a pace of price increases so gradual that consumers don’t perceive it in real-time and, importantly, a pace that’s too gradual to be news. It’s a kind of boiling frog dynamic where the frog somehow never dies, but actually prospers. I don’t know. Ask an economist.

Jokes aside, it makes some sense. A little inflation, over time, is a key ingredient to economic vibrancy. You don’t want stagnant or falling prices. That’s a recipe for a moribund economy.

Anyway, the simple figure below is a testament to the notion that far from being mutually exclusive, simplicity and profundity are often synonymous.

Maybe the Fed won the war, but it was a Pyrrhic victory.

This week, the US CPI update covering December will probably show that core consumer price growth ran at 3.8% on a YoY basis in the final month of 2023.

That’s still too hot. The frog’ll boil in that water. But we’re getting there.

The MoM increase is seen at 0.3%. If the YoY print matches estimates, it’ll be the slowest pace of annual core price growth since May of 2021.

The update will be contextualized by the December NFP headline beat and particularly by the warm read on average hourly earnings that accompanied the US jobs report. Obviously, a CPI overshoot would further undermine the case for a March rate cut from the Fed.

That said, the December jobs data was very noisy and the disparity between the two surveys, alongside a sudden plunge in the ISM services employment index, was enough to give observers pause.

“The employment situation report wasn’t without caveats; while NFP/UNR and AHE all pointed toward ongoing resilience on the labor front, the drop in the household survey jobs figures and the unanticipated decline in labor force participation tell a different story,” BMO’s Ian Lyngen and Ben Jeffery wrote. “[W]hen combined with the lowest services ISM since May [and the] weakest jobs component since July 2020, investors found plenty of reasons to buy bonds,” they added, noting that “the price action is in keeping with the prevailing cross currents in the present macro environment and reflects investors’ bias toward consolidation over trending in the new year.”

It’s worth noting that with Fed rate cut pricing for 2024 having retreated from local extremes, and with 10-year Treasury yields 25bps higher from the December 27 lows, CTA flows have apparently reversed.

“What is truly wild within this nascent bond wobble to start the year is that we now see CTA trend strategies reversing much of that prior short cover flow [and] adding back big notional in estimated aggregate G10 bond / STIR shorts over the past few days and weeks as the rally stalled and locally even reverses,” Nomura’s Charlie McElligott remarked, in a January 5 note.

Recall that CTA flows were a “one-way buy-to-cover” (as Charlie put it repeatedly last month) across legacy STIR and bond shorts in November and December. Those flows turbocharged the rates rally.

Other than CPI, the US data docket is fairly sparse. NFIB and PPI are the other notables. Supply will also be in focus this week courtesy of the threes/10s/30s series.

Fed speakers include Bostic, Barr, Williams and Kashkari. If Lorie Logan’s weekend remarks were any indication, the Fed intends to start socializing the debate around when to slow balance sheet runoff.

“In my view, we should slow the pace of runoff as RRP balances approach a low level,” Logan said, in San Antonio. “Normalizing the balance sheet more slowly can actually help get to a more efficient balance sheet in the long run by smoothing redistribution and reducing the likelihood that we’d have to stop prematurely.”

RRP balances retreated to a 31-month low last week as year-end effects faded. Some argue the Fed should halt QT altogether before the RRP facility is fully drained, just to be on the safe side.

Meanwhile, China will also report CPI and PPI data this week. Recall that the world’s second-largest economy is battling to stay out of deflation.

In the Mideast, a lot of people will die in the coming days. Most of them innocents. If you’re healthy, financially stable and physically safe, be grateful for your position in life. It’s more luck than anything else, after all. There’s no meritocracy. Not in America anyway.