Bond markets are flashing warnings signs about inflationary (and fiscal sustainability) risks across the globe. Government bond yields have risen sharply while, the US is in focus with Trump 2.0 imminent and the Fed’s new “phase” of monetary policy. Inflation, it seems, is now back in vogue which means the release of December’s US CPI report will be even more closely monitored both at home and abroad. It also comes after a blockbuster non-farm payrolls report, which further pushed back another rate cut by the Fed, boosting the dollar to new cycle highs.
Expectations for the final CPI report of 2024
Headline US CPI is expected to rise +0.3% m/m in December, matching the November reading, and 2.9% y/y, ticking up from 2.7%. The three-month annualised rate has picked up markedly since the summer. The core is forecast at 0.2% m/m and 3.3% y/y. Last time, housing looked a little more benign with rent hitting 0.2% m/m. Upside pressure came from vehicle prices with used up 2% m/m. This time, some gauges of price pressures have been rising recently, causing concern: chiefly the ISM Services PMI prices index rose to 64.4 in December from 58.2, the first time the index has registered over 60 since January.
Fed officials wary of price pressures
Meeting minutes for the FOMC’s December meeting revealed big concerns about inflationary pressures. Although participants expected inflation to keep moving towards 2%, the effects of potential trade and immigration policy changes suggest that the process could take longer than previously seen. That means there are higher risks of persistently elevated inflation. This tone has been reflected in recent official Fedspeak too. Fed Governor Bowman noted a lack of progress on inflation and argued that the Fed should be cautious in considering changes to rates. Fed’s Schmid warned the last stage of getting prices back to 2% could be the most challenging for monetary policy; Fed’s Collins, meanwhile, now expects more inflation relative to the recent past.
Watch bond markets for market reaction
The current global bond selloff has showed that other governments cannot afford hotter US inflation. Many incumbents are looking to raise money with ambitious budgets amid supply pressures and sticky domestic inflation – see the UK. Regarding specific interest rates, the Fed is now expected to go on an extended pause, especially after the potentially inflationary strong NFP data.
The question is now increasingly what are the chances of that next rate move upward? As we have mentioned, other recent data releases like the ISM Services prices paid component show strong economic momentum, implying that monetary policy isn’t in fact restrictive. Combined with the latest Atlanta Fed GDP estimate at 2.7%, the chances could rise that the Fed will have to hike rates sooner than many think. As for rate cuts, some economists are saying the December jobs report further proves that the Fed made a policy mistake by cutting rates 100 basis points last year. Furthermore, the longer the Fed is on pause, the more likely that the next move will be a hike. It all means Wednesday’s inflation data will be important, with USD near its two-year highs.