Source: AFP
Source: AFP
November’s US consumer price index (CPI) inflation data was weaker-than-expected for the second month in a row, raising hopes the end of the Federal Reserve’s (Fed) rapid interest rate tightening cycle this year is in sight. Overnight, 10Y US Treasury yields fell 10bps to 3.50%, the USD weakened, and the SPX rallied as investors bet inflation has peaked in the US.
Source: Bank of Singapore, Bloomberg
November’s consumer prices rose just 0.1%. Headline inflation thus fell from 7.7% to 7.1%. Core prices, excluding food and energy, also only gained 0.2% last month, lowering core inflation from 6.3% to 6.0%. Thus, headline CPI inflation has now fallen significantly from its four-decade peak of 9.1% in June. Similarly, core CPI inflation has eased from its four-decade peak of 6.6% in September as the first chart shows.
Source: Bank of Singapore, Bloomberg
US inflation remains far above the Federal Open Market Committee’s 2% target. But November’s data, coupled with softer inflation in October will be encouraging for officials. Inflation was weaker than expected because good prices are falling as the pandemic recedes and supply disruptions ease. Last month, used car prices – a component of the CPI – fell 2.9% after declining by 2.4% in October.
Cooling inflation will allow the FOMC to reduce its pace of rapid rate rises. Having increased the fed funds rate by 75bps for four meetings in a row to 3.75-4.00%, we expect the Fed will now hike by 50bps at today’s meeting. This will lift fed funds to 4.25-4.50% as the second chart shows.
Officials will also be wary of prematurely declaring victory. More sustained sources of inflation including rents and wages are still running far too hot for the Fed to meet its 2% target. The first chart shows owners’ equivalent rent is increasing by 7.1% compared to 6.0% for core inflation. In addition, November’s payrolls showed average hourly earnings rising by 5.1% as the US labour market remains tight after the economy reopened last year.
The FOMC’s new forecasts, also due today, are still likely to show further interest rate hikes will be needed to slow inflation with the fed funds rate projected to hit at least 4.75-5.00% in early 2023. Uncertainty on how high the Fed will increase interest rates may thus keep clouding the outlook for risk assets over the next few months.
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