Slightly Hot Dec US CPI Suggests Fed Won’t Rush To Cut


NEW YORK, Jan 11 (Reuters) – U.S. consumer prices increased more than expected in December as rents maintained their upward trend, which could delay a much anticipated interest rate cut in March from the Federal Reserve.

The consumer price index (CPI) rose 0.3% last month after nudging up 0.1% in November, the Labor Department said on Thursday. The cost of shelter accounted for the more than half of the increase in the CPI.

In the 12 months through December, the CPI rose 3.4% after increasing 3.1% in November. Economists polled by Reuters had forecast the CPI gaining 0.2% on the month and climbing 3.2% on a year-on-year basis.


STOCKS: U.S. stock index futures turned 0.14% lower

BONDS: U.S. Treasury yields rose right after the data, with 2-year note last at 4.371%, and the 10-year note at 4.038% FOREX: The dollar index turned 0.186% higher


SEEMA SHAH, CHIEF GLOBAL STRATEGIST, PRINCIPAL ASSET MANAGEMENT, LONDON “Today’s inflation report reinforces the notion that the market had gotten a little overexcited around the timing of rate cuts. These are not bad numbers, but they do show that disinflation progress is still slow and unlikely to be a straight line down to 2%. Certainly, as long as shelter inflation remains stubbornly elevated, the Fed will keep pushing back at the idea of imminent rate cuts. Yet, while the market was probably overenthusiastic in its initial expectations, the stars should finally align for Fed cuts – most likely around mid-year.”


“Looking through the small rise in headline inflation – which was due to energy prices rising – I think the message from this release is that core inflation is proving sticky. Core inflation only edged down very slightly to 3.9% y/y from 4.0% in November and was flat at 0.3% m/m. While the problem of high goods inflation looks to have been solved – with core goods prices flat or falling in sequential terms for six or seven months now – there is still quite a bit of work to do in bringing down services inflation. Services inflation is still over 5% y/y and running at 0.4% m/m. This is not consistent with overall inflation returning to 2% on a sustained basis. This will give the Fed grounds for caution and they are unlikely to cut rates as quickly as the markets currently expect.”


“Coming into today, the CPI report carried the heavy burden of having to reaffirm the foundation of the market’s psychology that the almost near consensus soft landing view isn’t just another crowded hope trade. Importantly, it needed to re-underwrite the market’s current pricing path that the Fed will start cutting rates in the first quarter.

“Specifically, the headline number came in hotter than expected and core CPI came in in-line with expectations. This print should challenge the markets expectations of rate cut timing. There is nothing in the report to cause the Fed to hurry to cut rates. However, because it was not too hot, it should leave the hopes of a soft landing intact.

“Ultimately, we are focused on the labor market to dictate the speed and extent of the cutting cycle, and we continue to believe the middle of the year to be more appropriate to start. Either way, the December inflation data is unlikely to change the overall dovish trajectory this year as material progress has been made. In our view, the dovish Central Bank tone, progress in inflation, decline in oil prices, and resilient, but loosening labor market are all positives for risk assets. We believe any inflation scare driven drawdowns should be bought.”


“A stronger set of inflation numbers from the US than was generally expected, the fallout from which will almost certainly be the chances of a March interest rate cut now being largely discounted. Although the core annual rate fell from 4.0% to 3.9%, the increase in the headline rate from 3.1% to 3.4% will not convince the Fed that inflationary pressures are definitively slowing, and adding into the mix last week’s employment report, which showed the labour market continuing to show resilience in the face of the Fed’s tightening delivered to date, the chances of a near-term easing in monetary policy looks quite remote now. Particularly concerning will be the fact that the core services component continues to show no real signs of moderation, and even though the chances of a March hike had already been fading, I think it is not unreasonable for Powell to try and play down the prospect of a May cut too when he speaks at the FOMC press conference on 31 January. Another monthly 0.3% reading when we get the January CPI numbers next month will probably be enough to rule out a May cut.”

PAUL NOLTE, SENIOR WEALTH ADVISER, MURPHY & SYLVEST, CHICAGO “It (inflation) is heading in the wrong direction. If you annualize 0.3%, we’re at 3.6%. That’s above what the Fed’s looking at.”

“It may push (rate cuts) out a little bit more from March to June. Our thought is that it’s the second half of the year discussion.”


“Inflationary pressures, while generally inching lower, remain stubbornly higher than expectations as the so-called “last mile” requires more time to reach the final goal. Treasury yields inched higher following release of the report, and equity futures edged lower. The last Fed minutes underscored that the path towards price stability remains uncertain, and today’s CPI report suggests that the Fed’s initial rate cut may be later than the market is hoping for.”


“CPI slightly increased, which should be a disappointment for stock investors, but it shouldn’t have an impact on the discussion around rate cuts for this year. The Fed came into this year expecting to cut 3 times (even though markets were pricing in twice as many) and this report shouldn’t change the Fed’s thinking.

“What should be most important for investors is that the Fed is done raising rates (and this report doesn’t change that at all), so whether they cut in March or cut in June and whether they cut 4 times, 3 times, or only 2 times, shouldn’t matter too much. As long as the economy stays out of recession the market will keep moving higher and we will have a positive 2024 (even if the gains aren’t as exuberant as last year), but if we do slide into the waiting-for-Godot recession, then the stock market could drop 20% or more, so that is the most important issue, not when or how many times the Fed ends up cutting in during this “normalization” phase.”


“If you put the numbers into context, it’s really not that bad. I don’t think there’s any change in the rate cut plan going forward. Anybody that gets wrapped up in one number is misplacing their emphasis. The economy is doing OK and inflation has come down. Anybody who thinks their expectations have changed is either bearish or they’re talking their book.”


“What this data really shows is that the path to a soft landing is not a straight line. The hotter-than-expected inflation number means investors have to rethink how many rate cuts the Fed will be able to pull off in 2024, and the market viewed the numbers as a disappointment and probably pushing out that first cut date.”

“We’re still thinking that the Fed might only get three cuts in this year, but clearly contrary to what the market has been pricing in.”


Read the full article.

This website may contain copyrighted material the use of which has not been specifically authorized by the copyright owner. This site operates under the assumption that this not-for-profit use on the Web constitutes a “fair use” of the copyrighted material as provided for in Title 17, Chapter 1, Section 107 of the U.S. Copyright Law. If you wish to use this copyrighted material for purposes of your own that go beyond such “fair use,” you must first obtain permission from the original copyright owner.

As a subject matter expert, Brian Jacobsen, Chief Economist at Annex Wealth Management is often interviewed with individuals not affiliated with the firm. Annex Wealth Management does not have control over the content or opinions expressed by these unaffiliated parties.

Annex Wealth Management, LLC is an investment advisor registered with the SEC doing business as Annex Wealth Management® (“Annex”). The information provided should not be relied upon by the viewer as legal or tax advice, or research or investment advice regarding any investment, nor should it be construed as a solicitation or recommendation to purchase or sell any stock, bond, or other security. This site contains excerpts from Annex’s live, unscripted and extemporaneous broadcasts. Considerable efforts are made to provide a balanced presentation and a sound basis for evaluating the content, however, live broadcasts don’t always lend themselves to a full and fair discussion of all the material facts and investor may want to consider before investing. All items on this site have been previewed by a qualified supervisor at Annex to avoid unqualified, promissory, exaggerated, unwarranted, or misleading statements or claims, including promises of specific future returns or projections of investment performance.