Inflation in the US runs hotter in December

Inflation in the US failed to cool as much as markets had been expecting with the headline CPI rising by 3.4% y/y in December, its fastest pace since September 2023. On a monthly basis inflation rose by 0.3%, faster than what markets had been expecting and an acceleration on the previous two months. Core CPI also failed to ease as much as expected, rising by 3.9% in December and up 0.3% m/m. Core goods prices were flat m/m, their first non-negative print since May last year, while so-called super core inflation held steady at 3.9%. Paired with a better than expected non-farm payrolls release earlier this month, the December inflation reading will erode market confidence that the Federal Reserve can cut rates as early as March: markets are currently pricing in around a 70% chance of a 25bps cut at the March FOMC.

Initial jobless claims in the US for the week ending January 6 fell to 202k, down marginally from the week prior, and lower than market estimates. Continuing claims also dropped to 1.83m in the week ending December 30. The claims data has started January on a strong footing which may allow another healthy, if moderate, non-farm payrolls report for the month.

CPI inflation in China declined by 0.3% y/y in December, its third consecutive month of deflation. Producer price inflation fell even more, down 2.7% y/y. The weak price indicators from China signal low levels of consumption in the economy as a heavy debt overhang related to the property market dampens sentiment while export demand is muted. Exports in December rose by 2.3% y/y while imports were up by just 0.2%.

Today’s Economic Data and Events

• 11:00 UK industrial production y/y Nov: forecast 0.7%
• 11:00 TU current account balance Nov: forecast -1.7bn
• 16:00 IN industrial production y/y Nov: forecast 3.4%
• 16:00 IN CPI y/y Dec: forecast 5.9%
• 17:30 US PPI final demand Dec y/y: forecast 1.3%

Fixed Income

• US Treasuries pared losses related to the December CPI later in the session with both the 2yr and 10yr UST rising. Yields on the 2yr UST dropped 11bps on the day to close at 4.2451% while the 10yr UST yield fell 6bps to 3.9658%.
• Loretta Mester of the Cleveland Fed said March was “probably too early” to cut rates as she wanted to see “more evidence” of prices declining. Mester also said she didn’t think the stronger than expected December print meant that disinflation would “stall out” but that the Fed couldn’t drop its vigilance on getting inflation lower. Elsewhere Thomas Barkin from the Richmond Fed was more sanguine about the December print, saying it had come in “about as expected” while Austan Goolsbee from Chicago said the Fed didn’t “make decisions about March, June and whatever, in January.”

FX

• Currency markets traded mixed overnight with most currencies selling off against the dollar on the release of the December CPI report before recovering ground later in the day. EURUSD closed unchanged at 1.0972 while GBPUSD closed the day up 0.1% at 1.276. USDJPY moved in favour of the yen, settling lower by 0.3% at 145.29.
• Commodity currencies were heavier with CAD losing about 0.1% and AUDUSD falling by 0.2% to 0.6688. NZDUSD managed to tick higher, up by 0.1% at 0.6233.

Equities

• Equity markets had a neutral close in response to the December CPI with the Dow Jones ending the day with a modest gain while the S&P lost about 0.1% and the NASDAQ closed unchanged. European markets were worse with the FTSE down almost 1% while the EuroStoxx index gave up 0.6%.
• Asian markets have had another strong open to their session with the Nikkei up 1.2% and the Hang Seng adding 0.4%.
• In local markets the DFM fell about 0.3% while the ADX gained 0.6%.

Commodities

• Oil prices recovered some ground overnight with Brent up 0.8% at USD 77.41/b and WTI adding 0.9% to USD 72.02/b. Both contracts are trading stronger in early trade today in response to escalating geopolitical tensions from the Middle East and Red Sea region. Iran reportedly seized an oil tanker off the coast of Oman while the US and its allies launched missile attacks on militant sites in Yemen that have been threatening Red Sea shipping.