Market Brief: US Inflation Holds Steady, Leaving Fed Easing Bets Intact

Underlying consumer price growth held steady in the United States last month, providing more evidence of a stalling disinflation process, while also giving the Federal Reserve room to continue easing policy at next week’s meeting. According to data published by the Bureau of Labor Statistics this morning, the core consumer price index—with highly-volatile food and energy prices excluded—rose 3.3 percent in November from the same period last year, up 0.3 percent on a month-over-month basis. This matched the median consensus estimate among economists polled by the major data providers ahead of the release.

On a headline all-items basis, prices climbed 2.7 percent year-over-year, accelerating slightly from the 2.6 percent pace set in October, climbing 0.3 percent from the previous month. The shelter sub-index—long the biggest contributor to overall inflation pressures—climbed by 0.3 percent as the “owners equivalent rent” category continued to soften, contributing almost 40 percent of the total monthly increase.

The data could suggest that progress in bringing inflation down is running out of steam, and might modestly lower the likelihood of a rate cut at next week’s policy meeting. We think, however, that forestalling a softening in labour markets has become more important to the majority of the decision makers on the central bank’s rate-setting committee, and believe that current market odds, which are estimating an 85-percent chance of a move, are broadly correct. If the Fed is going to turn more hawkish, a rise in the rate projections set out in the “dot plot” seems more likely than an outright pause at this juncture.

Treasury yields are edging lower on the margins as a relief rally unfolds, equity futures are moving higher, and the dollar is holding gains relative to its major rivals.

The Chinese renminbi is under selling pressure after a Reuters report suggested authorities could let the currency depreciate materially if Donald Trump follows through on his tariff threats. According to several sources, the exchange rate might be permitted to fall through the 7.50-per-dollar threshold - well below the 7.25 level that prevailed ahead of the article’s release - in 2025 as part of the government’s effort to offset any negative competitiveness shock emanating from a change in US trade policy.

This is a remarkable development. We can’t recall a historical instance in which Chinese financial authorities executed a behind-the-scenes jawboning effort of this kind on the currency front, and we think it could represent an advance effort to stem the capital flight that could be triggered during a sharp depreciation episode. In 2015, when the central bank devalued the exchange rate three times, poor messaging sparked a panic among onshore investors and households, triggering investment outflows amounting to hundreds of billions of dollars. By giving market participants advance notice - and by including a specific target level - officials may hope to avoid a repeat.

Markets are assigning above-80-percent odds to a jumbo-sized cut from Canada’s central bank this morning. We - like most of our counterparts - think policymakers will deliver a half-percentage-point move, but it’s a close call, and we can’t rule out a smaller, consensus-busting decision.

The case for an aggressive easing cycle is difficult to argue against. The lagged impact of post-pandemic rate hikes is still hitting households through mortgage renewals, unemployment is rising as population growth outpaces job creation, and business investment looks set to remain weak as the threat of a trade war with the United States clouds the horizon.

But the Bank of Canada has a long history of wrong-footing investors, and another surprise could be in the offing. With activity heating up in housing markets, consumer spending ratcheting higher, and positive spillovers from a strong US economy boosting economic growth prospects, there are reasons to think policymakers might opt to move more cautiously, cutting by less than expected today. A quarter-point move could lend the loonie some support.

The headwinds facing the currency are unlikely to fade either way. If the Bank delivers what is priced into markets for the next year, it will have executed the most aggressive easing cycle in the developed world, adding to weak domestic demand, US exceptionalism, and growing geopolitical uncertainty in keeping the Canadian dollar on the defensive for now.

**In a development that may be of interest to the finance nerds among you, the world’s oldest living bond turned 400 yesterday. The bond, issued by a Dutch water authority about 70 years before the English crown began doing the same thing, pays €13.61 per annum. That this is an amount insufficient to cover lunch for the bond's modern New Amsterdam owner illustrates the extent to which some types of debt never need be repaid, highlighting one of the key misunderstandings underpinning debates over government indebtedness

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