US Indices ultimately closed mixed with marginal upside with little changes in SPX, NDX and DJIA while the Russell 2000 underperformed. The majority of sectors closed in the green with Consumer Discretionary and Energy outperforming but Communication and Technology lagged, limiting the gains in the broader Indices. The focus of the day was on the US CPI data which ultimately was in line with expectations and sparked a dovish reaction due to the lack of upside surprise with traders boosting bets for a 25bps rate cut in December to a 85% probability vs c. 60% pre-release. The initial reaction was to sell the Dollar and Gold and buy stocks and bonds. The Dollar however swiftly reversed with focus returning to the Trump Trade which took DXY to fresh YTD highs. T-notes had pared in the long-end but the move held in the short-end with the curve notably steeper on the session as traders repriced December rate cut odds. Gold prices continued to sell throughout the session, falling beneath USD 2,600/oz to a low of USD 2,573/oz from a peak of USD 2,618/oz. Elsewhere, oil prices settled marginally higher in choppy trade in response to geopolitics. In FX, the antipodes and Japanese Yen underperformed with notable weakness seen once the dust settled from the initial CPI reaction. Core CPI in October rose by 0.28%, in line with the expected 0.3% and prior, but slightly down on an unrounded basis from 0.31%. The Y/Y was in line at 3.3%, matching the prior month’s pace while the headline figures were also in line with expectations. The headline M/M rose by 0.24%, in line with the 0.2% forecast and prior but slightly up on an unrounded basis from 0.18%. The Y/Y print rose by 2.6%, in line with analyst expectations, up from the prior 2.4%. The data has seen money markets start to price in a December rate cut with greater certainty given the lack of upside releases in the print. There is still another CPI report before the December 18th Fed Meeting, and both reports will be accounted for when the Fed makes their decision. Fed’s Kashkari, before the data, said that if inflation between now and the meeting comes in hot, then the Fed can pause, however given this data was in line it has given more certainty to another 25bps rate cut in December. Nonetheless, attention after December will turn to the rate outlook for 2025 with fears of an inflationary impulse seen in response to President-elect Trump’s policies (tax cuts, tariffs, increased spending). However, the Fed has said they will not front-run fiscal policy, but Powell did suggest in the Press Conference last week that they would implement policy into economic forecast models and the results would be taken into account. Looking into the report in more detail, Pantheon Macroeconomics highlights “Primary rent rose by 0.30%, slightly below its 0.36% six-month average, but owners’ equivalent rent increased by 0.40%. Together, these two components accounted for a hefty 0.15pp of the increase in the core CPI”. It also notes a 2.7% jump in used autos was also a main source of upward pressure in Core CPI. MUSALEM (2025 voter) said the Fed may be on the “last mile” to price stability and inflation is expected to converge to the 2% target over the medium term, thus, in accordance with prior remarks in October, where he expects inflation to hit the target over the next couple quarters. Musalem then went on to say monetary policy is “well positioned” and the Fed can “judiciously and patiently” judge incoming data to decide on further rate cuts. The 2025 voter said recent information “suggests” that the risk of inflation moving higher has risen, after saying in October that upside risks to inflation are still there but risks are not higher. He added risks to the job market remain unchanged or have even fallen. On the rate outlook, Musalem still won’t predict the timing or size of future Fed easing but did say further rate easing is appropriate if inflation continues to fall. In the Q&A thereafter, he said it is hard to derive much signal from most recent jobs reports as the lower number was clouded by the storm and other impacts, albeit, in the text release he noted the labour market remains in the range of full employment. In another set of remarks, Musalem said data since the Fed meeting suggests the economy may be materially stronger than expected and inflation data is also stronger, but he has not yet changed the view that policy is on a path to neutral. Musalem added that stronger data is likely behind the rise in Treasury bonds’ term premia. Noting that there is also some sense of higher inflation risk and some sense the Fed may not cut rates as much. He acknowledged the CPI data yesterday was as expected, but would have preferred to see some continued decline on a three-month basis. SCHMID (2025 voter), in wake of the data, said it remains to be seen how much more the Fed will cut rates, and where they may settle. He noted that rate cuts to date are an “acknowledgement” of growing confidence inflation is on the path to its 2% goal. Hopes that productivity growth can outrun the effects of slowing population growth and rising fiscal deficits. He will also not let enthusiasm over rising productivity get ahead of data or commitment to reaching the Fed’s goals. LOGAN (2026 voter), in a speech written before the inflation data, stated the Fed will “most likely” need more interest rate cuts, but should proceed cautiously. She said it is difficult to know how many rate cuts may be needed and how soon they need to happen. Models show that the FFR could be very close to neutral. The Dallas Fed president said that if Fed cuts too far, past neutral level, inflation could reaccelerate. She acknowledged the Fed has made a great deal of progress bringing down inflation and restoring balance to the economy, noting US economic activity is resilient. She added the Fed is not quite back to price stability yet, while the labour market is cooling gradually but not weakening materially. Sees upside risks to inflation and downside risks to employment, says financial conditions pose biggest potential challenges for monetary policy. On the recent rise in bond yields, she said it in part reflects a rise in term premiums, but if the rise continues, the Fed may need less restrictive policy. KASHKARI (2026 voter), speaking after the US inflation data said that Wednesday’s inflation data, on the headline level, seems to be confirming the path the Fed is on, and right now, “think inflation is heading in the right direction and have confidence on that”. Furthermore, the Minneapolis President is not ready to say that inflation is stuck above 2%, and if inflation is heading in the correct direction fast enough, stated “we will see”. On the labour market, thinks it is currently in a good place, and said it is strong and healthy, and wants to keep it this way. Speaking of December and the Fed neutral rate, said it is still around six-weeks until the next Fed, with more data to come, and there is tremendous uncertainty on the neutral rate. Elsewhere, Oil closed 0.33% higher while a stronger Dollar saw Gold fall a further 0.7%.
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