Both Equity Markets and Treasuries saw hefty bids on Wednesday in response to the soft-leaning US CPI report which saw participants boost rate cut bets. 40bps of easing is now priced through year-end, back to around pre-NFP levels. Sectors were bid with notable outperformance in the heavyweight sectors (tech, comms, discretionary) and financials. Futures had already caught a bid pre-CPI data in response to the stellar bank earnings which kicked off the Q4 24 earnings season to a strong start seeing widespread beats. Meanwhile, NVDA and quantum computing names rallied after NVDA announced a quantum computing event while semiconductor ETFs were also bid. Elsewhere, crude prices surged to see WTI reclaim USD 80/bbl for the first time since August with price action still underpinned by US energy sanctions on Russia, but with added support from both Russia and Ukraine were targeting energy facilities in recent strikes. Meanwhile, a Gaza ceasefire was agreed upon late yesterday but it had little sway on price action with crude continuing to storm higher. In FX, the Dollar initially tumbled on the CPI report to see the Dollar Index print a 108.59 low however it largely pared those losses while other assets (stocks and bonds) held onto gains but the Dollar Index reclaimed 109.00. Meanwhile, both the Euro and Swiss Franc underperformed with the Dollar while the Japanese Yen and Australian Dollar outperformed. The Yen was buoyed by rate hike commentary from the Bank of Japan Governor Ueda overnight, noting the BoJ will hike rates if improvement in economy and price conditions continue. The dovish CPI report saw crypto assets surge with Bitcoin briefly reclaiming USD 100k. Overall, US CPI leant on the softer side of expectations. Core CPI was in line at 0.225% (exp. 0.2%), cooling from the prior 0.3%, with Y/Y at 3.2% down from the prior and consensus of 3.3%. The headline came in at 0.393%, above the 0.3% forecast and prior, while the Y/Y rose by 2.9%, in line with expectations but up from November’s 2.7%. Although headline M/M was above forecast, it was primarily led by gains in energy, which accounted for over 40% of the monthly all-items increase. The core metrics therefore took focus with an in-line M/M and soft Y/Y print, which has seen markets move dovish with 41bps of easing now priced for the year, back to around pre-NFP levels. Meanwhile, the first rate cut is now fully priced by July, versus September pre-data. After the cool PPI report on Tuesday and now the CPI report, Pantheon Macroeconomics have updated their Core PCE forecast, expecting Core PCE rose 0.19%, down from the 0.30-0.35% forecast after the PPI data, which was primarily led by a surge in airline services. The NY Fed Manufacturing Index disappointed in January, with the headline business conditions falling to -12.6 from +2.1, despite expectations for a rise to 3.0. The drop was led by New Orders which fell to -8.6 from +4.3, however, the six-month business conditions outlook rose to 36.7 from 26.9. Employment also rose, to +1.2 from -6.6. Prices Paid also gained, to 29.1 from 21.1. To summarise, the report notes “New orders fell modestly, and shipments were little changed. Delivery times were slightly longer, and supply availability was unchanged. Inventories grew slightly. Labor market indicators pointed to steady employment levels but a shorter average workweek. Both input and selling price increases picked up. Firms grew more optimistic that conditions would improve in the months ahead.” The Fed’s Beige Book saw economic activity increase slightly to moderately across the twelve Federal Reserve Districts in late November and December. Consumer spending moved up moderately, with most districts reporting strong holiday sales that exceeded expectations. More contacts were optimistic about the outlook for 2025 than were pessimistic about it, though contacts in several Districts expressed concerns that changes in immigration and tariff policy could negatively affect the economy. On the labour market, employment ticked up on balance, with six Districts reporting a slight increase and six reporting no change. Contacts across multiple sectors noted difficulty finding skilled workers, and reports of layoffs remained rare. However, contacts in some Districts expressed greater uncertainty about their future staffing needs. Wage growth picked up to a moderate pace in most Districts, though there were some reports that wage pressures had eased. Prices increased modestly overall, with growth rates ranging from flat to moderate. Meanwhile, contacts expected prices to continue to rise in 2025, with some noting the potential for higher tariffs to contribute to price increases. Finally, New York President Williams, said that monetary policy is data-dependent in a highly uncertain environment, noting that government policy outlook is the main source of uncertainty. However, policy is well positioned for the economic outlook but the Fed is in wait-and-see mode to see what elected officials do on policy. Willaims said that the disinflation process is to continue but it could be choppy but he still sees it moving to 2% over the coming years. Some disinflation is coming from outside the US. He expects unemployment to hold between 4-4.25% (Fed median view for 2025 is 4.3%). Williams noted that housing-related inflation pressures are easing but housing demand remains very strong. Williams added inflation expectations are anchored, adding the economy has returned to balance. He is optimistic about the US productivity outlook, but on the neutral rate, he suggested a wildcard for the neutral rate view is much higher levels of debt, adding higher government debt may have lifted the estimate. He noted views on neutral rate are not a big issue when setting policy. The NY Fed President also does not see higher yields reflecting a big inflation view shift and he is not surprised bond yields have risen. He said term premia factors are a big part of climbing bond yields and there is no prediction of when balance sheet contraction will stop. He also said it is hard to know how Fed bond holdings are affecting yields, and that the Fed has no current plans for asset sales. Elsewhere, Oil surge 4% while Gold ended Wednesday with a 0.7% gain.
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