US Core CPI lower than expected in December

US headline CPI rose 0.4% m/m in December, up from the 0.3% recorded in November, marking the fastest pace of monthly growth since March 2024. The pick-up on the month was supported by a 4.4% rise in gasoline prices, together with continued pressure from shelter costs. On an annual basis the headline measure rose to 2.9% from 2.7% in November. There was more encouraging news when looking at core inflation, which came in slightly weaker than had been expected. On a monthly basis, core CPI rose 0.2% m December, relative to expectations of a 0.3% gain. That left core CPI at 3.2% y/y in December, down from 3.3% the month prior. Markets have interpreted the data as being more supportive of a H1 2025 rate cut by the Fed.

UK consumer prices rose 0.3% m/m in December, up from the 0.1% m/m growth recorded in November, but below market expectations for a 0.4% rise. On an annual basis, CPI declined to 2.5% y/y in December, down from 2.6% in November. Restaurant and hotel prices made the largest downward contribution to the annual change in December. Officials at the Bank of England will take comfort in the material slowing in services sector inflation, which rose at 4.4% y/y, down from 5% in November.

Inflation in Saudi Arabia rose 1.9% y/y in December, marginally lower than the 2% pace of growth seen in November. The December figure leaves average annual inflation in the Kingdom at 1.7% for 2024, down from an average of 2.3% in 2023 The housing and utilities component continues to be the primary driver of the headline number, growing 8.9% y/y in December.

Today’s Economic Data and Events

• 11:00 UK GDP (Nov). Forecast: 0.2% m/m
• 11:00 UK Industrial production (Nov). Forecast: 0.1% m/m
• 17:30 US retail sales advance (Dec). Forecast: 0.6% y/y
• 17:30 US initial jobless claims (w/e Jan 11). Forecast: 210k

Fixed Income

• US treasury yields fell sharply on Wednesday, as markets reacted to a lower-than-expected core CPI print for December. That combined with the PPI data, have markets more optimistic about the chance of a Fed rate cut in the first half of 2025. The 2yr yield fell 10bps to 4.2638%, while the 10yr yield dropped 14bps to close at 4.6531%.
• Major European bond yields fell in tandem with the US inflation print. The 10yr Bund yield fell 9bps to 2.559%. The 10yr UK Gilt yield dropped by 16bps to reach 4.7294%, with UK inflation data also coming in weaker than had been anticipated.

FX

• The dollar spot index fell for a second consecutive day on Wednesday, following US inflation data, falling 0.17%. Moves against major peers were however mixed. EURUSD fell 0.18% to 1.0289, while GBPUSD gained 0.22% to 1.2242. USDJPY fell 0.9% to 156.47.
• Commodity currencies were stronger against the dollar on the day. AUDUSD gained 0.5% to 0.6227, NZDUSD rose by 0.2% to 0.5616, and USDCAD fell 0.06% to 1.4341.

Equities

• US equity markets rose sharply on Wednesday, buoyed by a weaker core CPI print and solid earning results from several large banks. The Dow Jones gained 1.65%, the S&P 500 rose 1.83%, and the NASDAQ climbed 2.45%.
• The US inflation print also fueled a rally in European equity markets. The Eurostoxx 50 rose 1.04%, the CAC 40 gained 0.7%, and the DAX increased by 1.5%. The FTSE 100 rose 1.2%, with domestic-facing UK firms also benefiting from lower UK CPI data.
• Locally, the ADX rose 0.17% while the DFM gained 0.1%. The Tadawul rose 0.32%.

Commodities

• Oil markets rose on Wednesday, despite cooling geo-political tension in the region, with Brent futures gaining 2.6% to reach USD 82.03/b and WTI rising 3.3% to USD 80.04/b. Markets appear to have responded to the IEA’s January oil market report, which highlighted sanctions on Russian oil as having the potential to “significantly disrupt” supply chains. In addition, US inventories reportedly fell to their lowest level since April 2022.
• The IEA also updated their forecasts for 2025, with the agency expecting oil demand growth of 1.05m b/d this year, an acceleration from the 0.94m b/d estimated for 2024. The outlook for 2025 was revised marginally lower, relative to previous forecasts, thanks to lower estimates for non-OECD demand growth. The IEA noted that supply risks for oil have grown in response to the US imposing new and more restrictive sanctions on the shipment of Russian oil. However, they still noted that supply growth from outside of OPEC+ countries will be enough to offset demand growth this year, contributing to a surplus in oil market balances.
• OPEC estimates oil demand growth of 1.45m b/d in 2025, unchanged from its prior estimate, led by emerging economies. For 2026, the exporters’ alliance expects demand growth to be steady at 1.43m b/d, with both developed and emerging economies providing growth. OPEC expects a shallower path of non-OPEC+ supply growth this year than the IEA does at 1.1m b/d with most of the growth from the US and South America.