Chief Investment Strategist
Summary: The US inflation was a mixed bag, as headline and core prints rising month-on-month but headline YoY came down and core YoY was unchanged. Details and long run trends suggest disinflation continues, but today’s announcement may be the Fed’s final chance to push back on market’s rate cut pricing. We consider three scenarios for Fed’s 2024 dot plot and the market impact that could bring.
US November CPI was a mixed bag. Headline CPI came in above expectations at 0.1% MoM vs. flat previous and expected, while the YoY cooled to 3.1% from 3.2% previously. Core measure was as-expected at 0.3% MoM (prev: 0.2%) and 4.0% YoY (prev: 4.0%).
While some could say the disinflation has made further progress (as headline YoY was down), others could say that core is rather sticky at 4% YoY.
The breakdown suggests that the cooling in core goods inflation is broadening, which suggests that the decline could be sustainable. Core services was a key problem area, and it appears that only a few categories, particularly shelter, drove much of the upside. Long run trends continue to suggest that the disinflation momentum is extending. Meanwhile, with oil prices near their recent floor of sub-$70/barrel for WTI, there will be little reason for the Fed to panic about anything seen in the latest inflation report.
The December meeting is the Fed’s last chance to pushback on rate cut expectations. It remains clear that the rate hike cycle has ended, and investors are now focused on when the rate cuts could begin. That will make the dot plot very relevant today, although the ability of the dot plot to predict the future has been poor.
The September dot plot, as shown above, had a median 2023 projection of 5.6% as another rate hike was in the forecast. That will be removed and 2023 dot will be at 5.4% now. As for 2024, there are three scenarios:
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