US CPI surprises to the downside, again

For the second month in a row, the US CPI inflation gauge has fallen more than the consensus forecast in November:

  • US CPI +0.1% MoM, +7.1% YoY (down from +7.7% in October). The consensus forecast was looking for YoY CPI to fall to 7.3%.
  • US Core CPI +0.2% MoM, +6.0% YoY (down from +6.3% in October). The consensus forecast was expecting a decline in the YoY CPI to 6.1%.

The breakdown of the MoM contributors shows that Services are the only component that is decisively contributing to the monthly rises. Goods and Energy are now both in decline for the first time since mid-2020. 

The data from the US Bureau of Labor Statistics show that this is primarily due to “Shelter” costs.

What does this mean?

After several announcements of tier one US data has surprised to the upside in recent weeks (along with the US PPI also being higher than expected), markets had been more cautious of late. The positioning for the “Fed pivot” was being questioned. However, this CPI data confirms that US inflation is on the path lower. 

It should be important for the FOMC monetary policy decision tomorrow. It should confirm that the Fed to hike by 50bps (down from the 75bps that it has hiked for the past four meetings). This is already expected by consensus but will confirm this now. However, the important nuance will mean that it will likely restrict any significant hawkish leaning in the forward guidance of the dot plots and inflation projections. 

Already we are seeing Fed Funds futures are pricing in a lower terminal rate. The terminal rate was around 5.00% yesterday. It is currently pricing around 4.85%.

Initial Market Reaction

A lower potential peak in US interest rates is decisively impacting major markets. Lower yields, lower USD and support for risk appetite:

  • US Treasury yields are lower – Yields are lower across the curve. The 2-year yield (seen as the market’s outlook for US interest rates)  is -21bps from yesterday’s close and the 10-year yield is -15bps. 
  • USD is falling – The USD is being sold off. EUR/USD has broken above the key resistance at 1.0615. If this can hold then it opens the May highs of 1.0785.
  • US equities have jumped – S&P 500 futures have jumped from c. 4019 to 4115, almost 100 ticks (c. +2.4%)
  • Gold has spiked higher – Gold is up by $27 above the $1810 resistance.

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