Market Brief: Softening In Underlying US Inflation Triggers Global Relief Rally

Underlying inflation showed signs of decelerating in the United States last month, avoiding a widely-feared surge, and giving the Federal Reserve some breathing room as officials assess their next steps. The dollar is retreating against its major counterparts, Treasury yields are falling across the front end of the curve, and equity futures are surging as a relief rally unfolds across asset classes.

Core price growth faded somewhat. According to data just published by the Bureau of Labor Statistics, the core consumer price index—with highly-volatile food and energy prices excluded—rose 3.2 percent in December from the same period last year, up 0.2 percent on a month-over-month basis. This was slightly below consensus estimates among economists polled by the major data providers ahead of the release.

But headline inflation remained stubbornly high. On an all-items basis, prices climbed 2.9 percent year-over-year, speeding up from the 2.7 percent pace set in November, and were up 0.4 percent from the previous month. Energy costs did much of the heavy lifting, with a 4.4-percent increase in gasoline costs helping the category contribute roughly 40 percent of the monthly headline gain. Prices also rose for shelter, airfares, vehicles and auto insurance, and medical care.

Data released yesterday showed producer prices—another input into the Fed’s preferred core personal consumption expenditures measure—turning in a mixed performance in December, providing some relief for Fed officials who are growing wary of a reacceleration in price growth. Tomorrow’s import price index will provide the last piece of the inflation puzzle ahead of the central bank’s meeting next week, but as it stands, a prolonged pause in rate cuts seems to be in the cards.

On the other side of the Atlantic, inflation also slowed in December. Data published by the Office for National Statistics earlier this morning showed consumer price growth softening to a year-over-year pace of 2.5 percent, down from 2.6 percent in November, and below market expectations. Gilt yields are coming down off a 17-year high as traders move to price in more cuts from the Bank of England—more than 50 basis points in easing are now expected by year end, up from yesterday’s 40 points. The pound was inching higher ahead of the US inflation print, exhibiting emerging market-like trading dynamics as ebbing stagflation fears translated into currency strength.

The yen is outperforming most of its peers after central bank governor Kazuo Ueda suggested that a rate hike could come as soon as next week’s meeting. "There was a lot of positive talk on the wage outlook" when the Bank of Japan’s branch managers met last week, he said at a regional bank event—and inflation pressures are rising—but the incoming Trump administration’s initial policy signals could roil markets and delay tightening efforts. "We are currently analysing data thoroughly and will compile the findings in our quarterly outlook report. Based on that, we will discuss whether to raise interest rates at next week's policy meeting and would like to reach a decision”.

Risk appetite broadly improved after yesterday’s Bloomberg report suggesting that members of the incoming administration could slow-walk tariff increases, but this didn’t last. “For far too long, we have relied on taxing our Great People using the Internal Revenue Service,” president-elect Trump said in a post on his Truth Social platform. “I will create the EXTERNAL REVENUE SERVICE to collect our Tariffs, Duties, and all Revenue that come from Foreign sources”, “We will begin charging those that make money off of us with Trade, and they will start paying, FINALLY, their fair share. January 20, 2025, will be the birth date of the External Revenue Service”.

Putting aside the fact that the Customs Service has existed since July 1789, this could prove challenging from an optical standpoint: even if the incoming administration were to succeed in raising tariffs to 50 percent on the total 3.8 trillion dollars in goods imported into the United States each year—and if this (incredibly) didn’t cause companies and consumers to reduce their purchases—taxes assessed by the Internal Revenue Service would still dwarf those collected by its “external” equivalent, and the gap between campaign promises and realised results would soon become glaringly obvious. If only for political reasons, the president-elect's trade messaging seems likely to shift in a more nuanced direction over time.

Economic Calendar