Marketmind: Disinflation elation

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

It will likely take a big surprise in Thursday's critical U.S. inflation update to knock markets off their assumption that 2023 is a year of disinflation and peaking interest rates.

The consumer price report has been the pivotal monthly data point during the past year of inflation angst, with some of the biggest one-day market moves of the past 12 months coming around the release.

As ebbing annual inflation has surprised to the downside for two months in a row now and consensus forecasts are for another hefty decline in headline and 'core' rates in December, Wall St was pumped up on Wednesday in advance and the S&P500 closed more than 1% higher.

For the record, economists polled by Reuters expect annual headline consumer price inflation fell back to 6.5% in December from 7.1% the previous month, with core rates also dropping to 5.7% from 6.0% - bringing both readings to their lowest in a year or more.

Whether the Federal Reserve policymakers will publicly chime with the disinflation narrative or not, many acknowledge their policy stance is now 'data dependent' from here.

And unless disavowed of it by hard evidence, markets already assume the inflation battle is as good as won. Two-year inflation expectations in the Treasury bond market have fallen back to within a whisker of the Fed's 2% target for their first time since 2020 from a high near 5% last March.

World stocks markets and U.S. futures were mostly flat on Thursday ahead of the release, with European shares continuing to outperform as mild winter weather and sharp declines in natural gas prices ease anxiety about recession in the region.

Although Brent crude oil prices climbed on Thursday, year-on-year price moves are still negative - where they've been since last week. The dollar and U.S. Treasury yields were slightly lower.

Japan's yen was one of the biggest gainers after a Japanese press report that the Bank of Japan will review the side effects of its cap on government bond yields at a policy meeting next week and may take additional steps to correct what it sees as distortions in the market.

This likely refers to the fact that 10-year Japanese yields have been stuck at the new BOJ yield ceiling of 0.5% for four sessions, even as the BOJ has bought bonds in bulk to reduce them. It stokes speculation of a further rise in the yield cap that effectively amounts to a tightening of BOJ policy.

China's inflation rate crept back up last month too but it remains below 2% and annual producer price inflation is still in negative territory.

Although UK bond yields and sterling skidded lower on Wednesday in mix of recession concerns and energy price disinflation hopes, there was better news on the retail front today.

British shoppers spent freely around Christmas, even though retailers warned they will tighten their belts in 2023. Tesco (OTC:TSCDY) and Marks & Spencer (OTC:MAKSY), two of Britain's biggest retailers, posted better than expected Christmas sales as people snapped up festive treats.

In U.S. corporate news, attention was on Walt Disney (NYSE:DIS) as the entertainment giant and billionaire Nelson Peltz squared off for a boardroom battle with Disney, which has denied the prominent activist investor a seat on its board.

Sandwich chain Subway is exploring a sale of its business that could value the firm at more than $10 billion, a source told Reuters on Wednesday.

In earnings, Taiwanese chipmaker TSMC reported a forecast-beating 78% rise in quarterly profit on Thursday, as strong sales of advanced chips helped it defy a broader industry downturn that battered cheaper commodity chips.

Diaried events and data releases that may provide direction to U.S. and world markets later on Thursday:

* U.S. Dec consumer price report, weekly jobless claims, Dec Federal budget. U.S. Treasury sells 30-year bonds

* Philadelphia Federal Reserve President Patrick Harker, St Louis Fed President James Bullard, Richmond Fed chief Thomas Barkin all speak. Bank of England Monetary Policy Committee member Catherine Mann speaks.

* Corporate earnings: TSMC, Infosys (NYSE:INFY)

(By Mike Dolan, Editing by Raissa Kasolowsky mike.dolan@thomsonreuters.com. Twitter: @reutersMikeD)