The prospects that the Federal Reserve would begin slowing its purchases sparked a market meltdown in 2013. The “taper tantrum”, as it was dubbed, destabilized the capital markets. Now it is as if the markets have had a second tantrum, but this time US Treasuries rallied. Â
Falling market-based measures of inflation expectations, concerns about world growth prospects,  and a strong dollar environment have seen the pendulum of market sentiment swing in favor of the persistence of disinflationary forces. That is why this week’s September CPI report is important.  While the weakness in energy prices will  restrain the headline, the core rate is likely to remain firm, just below 2%. Higher housing costs and rents are behind the stickiness of the core. Â
There has been a longstanding narrative of an inflationary risk posed by the expansion of the Federal Reserve’s. This was understood to mean something much more undesirable than a rise in the equity market. Many investors also feared that when the Fed would stop buying long-term assets, yields would rise.  Â
Now the narrative is the rekindling of disinflationary forces if the Fed stops providing ongoing monetary support, in the face of global headwinds that undermine growth. The market had already begun correcting its excesses before the weekend, and the CPI report can spur further correction. Still, with many investors stunned by the recent price action, and the Federal Reserve meeting is not until the end of the month, many may be reluctant to commit.Â
At the same time, developments in the eurozone underscore the negative outlook, and why more currency adjustment, on a medium-term basis, is still the most likely scenario. The week begins off with the launch of the ECB’s covered bond buying program. The week finishes (October 26)  with the publish the results of the Asset Quality Review and stress tests. In between, the key flash PMI will be released; the first for Q4 and the composite is expected to have fallen for the third consecutive month. Â
