US CPI was in line with estimates in October and is expected to continue to moderate. The market is now more focused on the outlook for Fed policy in 2025 after Republicans won the election trifecta. The market anticipates one more Fed Funds rate cut in 2024 and potentially as few as two cuts in 2025. Please refer to the US interest rate probability curve graph below.
US CPI increased by +0.2% in October on a seasonally adjusted basis, according to the Bureau of Labor Statistics. Core CPI ex-food & energy increased by +0.3%. Both readings were the same as last month and in line with estimates.
The annual increases in both series were also in line with forecasts but accelerated due to base effects as some of the higher readings a year ago dropped out of the comparison period. The headline series rose from +2.4% yoy last month to +2.6% yoy, while core CPI rose from +3.3% yoy to +3.6% yoy.
Household essentials continue to see the largest price increases. The index for shelter rose +0.4% in October, accounting for over half of the monthly headline increase, and +4.9% yoy.
The food index also increased over the month, rising +0.2% as the food at home index increased +0.1% and the food away from home index rose +0.2%.
The energy index was unchanged over the month, after declining -1.9% in September. Energy prices are down -4.9% yoy, due to a -12.2% annual drop in gasoline prices and -20.8% yoy fall in fuel oil prices. However, electricity costs have risen by +4.5% over the last twelve months.
Real average weekly and hourly earnings rose by +1.4% yoy, which was an acceleration in the weekly series from a revised +1.1% yoy.
Also last night, several news agencies have called the House election for the Republicans. With the party controlling both chambers of Congress, it will be much easier for the incoming Trump administration to pass legislation.
S&P500 5,985 (unch), Nasdaq Comp. 19,231 -0.3%, S&P/ASX200 future 8,256 +0.4%,
US 2yr 4.29% -5bps, US 10yr 4.45% +2bps
US dollar (DXY) index 106.50 +0.5%, AUDUSD 0.6487 (unch), Gold US$/oz 2,573 -1.0%
Fin-X Wealth View
The inflation report provided few surprises. But if PPI also comes out in line tomorrow, it seems likely that PCE inflation will also be a little firmer.
Since the report was released, Minneapolis Federal Reserve Bank President Neel Kashkari said on Wednesday that he is confident inflation is headed down and not stuck above +2% yoy. He pointed to the decline in goods inflation, the slowdown in wage growth, and the fact that leading indices still indicate that shelter inflation will eventually moderate. We share this view.
Consequently, market pricing has adjusted to a slightly higher 82% chance of one more Federal Reserve rate cut in 2024 to bring the policy rate in line with Australian rates at 4.25% - 4.50%. This implies that short-term hedging costs of US dollar assets should be near 0%, and Australian investors could earn additional hedging yield on a diversified international portfolio due to lower short-term rates in other currencies.
However, the December meeting will also be the first opportunity for FOMC members to update the "dot plots" since the election. At a conference hosted by the Kansas and Dallas regional Federal Reserve Banks, the presidents of both suggested that FOMC should proceed with caution next year as the neutral rate of interest might be higher than previously anticipated.
The Treasury yield curve steepened last night as long-term yields rose, suggesting that the market also sees the potential for a higher neutral interest rate. After consistently pricing more aggressive cuts than the FOMC over the last two years, the market now expects higher 2025 Fed Funds rates than projected by the FOMC in September. Assuming rates are cut by -0.25% this December, market pricing implies only two more -0.25% cuts next year, as shown in the US interest rate probability curve graph below. This would bring the policy rate to 3.75% - 4.00%.
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