All eyes on CPI

Today’s US CPI print for November is pivotal for markets. It is expected to show a 0.3% MoM gain for headline inflation, the annual rate is expected to rise to 2.7% from 2.6%, while the annual rate of core inflation is expected to remain at 3.3%. We do not think that the outcome of this report will detract from the Federal Reserve cutting interest rates next week, there is currently an 86% chance of a rate cut priced in by the Fed Fund Futures market. However, a hot inflation print, that pushes headline inflation well above estimates, could lead to questions being asked about the wisdom of cutting interest rates when inflation remains high, and before the new Trump administration comes in with policies that could trigger even more price pressure down the line.

Inflation stuck in a rut

The Fed’s mandate is not purely price stability, it also needs to ensure full employment. It is doing well on the second part of its mandate, the November NFP report showed that the US economy created 227k jobs last month, even though the unemployment rate rose to 4.2%, the highest level since August. Thus, it would make sense for the Fed to concentrate more on prices, especially since the disinflation trend has come to a halt in 2024, with headline inflation stuck in a range between 2.4% and 3%. Thus, the outcome of this report may carry more significance than some may think.

There are approximately 100bps of further rate cuts priced in by the Fed Fund Futures market between now and April 2026, these could be scaled back before year end if inflation readings show that price pressures are building. The Fed’s preferred measure of inflation is Core PCE, will not be released until 20th December. Current expectations are for a rise to 2.9% YoY from 2.8% YoY.

Lead indicators suggest that price pressures are building

Lead indicators suggest that price pressure is building, especially in the services sector. The Manufacturing ISM prices paid survey fell to 50.3 from 54.8 in October, however this is a volatile index that is mostly made up of energy prices. The service sector ISM for November saw the price component rise to 58.2, defying expectations of a decline. This suggests that sticky inflation in the service sector will be the thorn in the Fed’s side for some time.

Will this CPI report trigger a shift in Fed rhetoric?

While the inflation report has the potential to be market moving, we think that unless we get a major shock, the market could digest the report fairly easily. However, the recent trend in price pressures could trigger a shift in the Fed’s messaging. If it sounds like they are worried about the slowdown in the disinflation trend then we could see the market price out rate cuts for next year, however, we think that the Fed would need to sound hawkish next week for that to happen.

The market reaction to CPI

The US stock market’s reaction to CPI has lost strength in 2024, as inflation has settled in a range, and the response in the S&P 500 in the 30 mins after a release is negligible. However, the impact is greater in the FX market, which suggests that the dollar could be sensitive to today’s report. In the past 12 months, the dollar has, on average, risen vs. other G10 currencies in the 30 minutes after a CPI release. GBP/USD has had an average move of -0.1%, EUR/USD of -0.11%, and USD/CAD of 0.11%. This suggests that the dollar could catch a bid later today if inflation is stronger than expected.

The Pound’s march higher could continue

Elsewhere, European stock index futures are lower again today. After rising to a two-year high vs. the euro, the pound is stable on Wednesday. EUR/GBP has settled below 0.8250, however, positive momentum is building in the pound. GBP is the strongest performer in the G10 FX space so far this month, which leaves EUR/GBP vulnerable to a further decline, potentially back to 0.80.