US inflation cools at slowest pace in months

US CPI inflation slowed to 7.1% in November, down from 7.7% in October. This was lower than the consensus forecast of 7.3% and marks the slowest pace of price growth since December last year. Core inflation also slowed, from 6.3% to 6.0%, with the results giving space to the Fed to slow its pace of rate hikes at this week’s meeting from 75bps to 50bps. Prices were 0.1% higher m/m for headline and 0.2% for core.

The UK unemployment rate ticked up modestly over the three months to October, from 3.6% to 3.7%. This was in line with expectations, and makes the case for the Bank of England to slow the pace of its rate hikes at its Thursday meeting, with a 50bps hike the widely anticipated outcome, despite weekly earnings growth coming in slightly hotter than expected at 6.1% w/w. The CPI print due tomorrow could prove the deciding factor for MPC members – the y/y measure is expected to slow modestly, from 11.1% in October to 10.9% last month.

In Germany, the ZEW surveys were somewhat mixed yesterday as the expectations measure came in at -23.3, from -36.7 in October and compared to consensus projection of -26.4, while the current situation index improved only modestly to -61.4 from -64.5, and worse than the predicted -57.0. The improvement on expectations was driven by a better-than-expected energy situation as we head into the cold winter months, and on the expectation that rate hikes from the ECB will start to slow – the central bank is due to make its rate decision on Thursday, with a 50bps hike expected. Nevertheless, Europe’s largest economy remains under pressure from high price growth and a restrictive monetary environment and is expected to contract next year.

Today’s Economic Data and Events

• 11:00 UK CPI inflation, % y/y, November. Forecast: 10.9%
• 23:00 US FOMC rate decision, upper bound. Forecast: 4.5%

Fixed Income

• Yields on USTs fell on the back of the inflation print yesterday. The 10y fell 11bps to 3.5012% while the 2y dropped 16bps to 4.2183%.
• While a 50bps hike to the fed funds rate remains the most likely outcome of the FOMC’s meeting tonight, markets pared their expectations for hikes next year. What will be key this evening is the revised forecasts and the press conference from Jerome Powell.
• In Europe, 10y gilts rose 10bps to 3.301% while 10y bunds dropped 1bps to 1.920%

FX

• The dollar index closed down -1.1% yesterday to 103.980, the lowest level since June, as the CPI print weakened the greenback against its peers as expectations of coming rate hikes moderated.
• Sterling added 0.8% to 1.2350 while EUR closed up 0.9% to 1.0633, the highest since June for the single currency.

Equities

• Equity markets surged on the back of the lower-than-expected CPI print in the US yesterday, with all three benchmark indices securing strong gains. The NASDAQ, Dow Jones, and the S&P 500 gained 1.0%, 0.3% and 0.7% respectively.
• Earlier in the day, Asian markets were also broadly positive, with the Hang Seng benefitting from reports around easing of zero-Covid restrictions in China. The index closed up 0.7%, although the Shanghai Composite dropped 0.1%.
• Locally, the DFM closed down 0.5% and the ADX 1.9%. Saudi Arabia’s Tadawul added 1.9%, benefitting from a rise in oil prices.

Commodities

• Oil prices enjoyed gains yesterday on the back of the US CPI print and hopes for an easing of restrictions in China. Brent futures ended the day up 3.5% at USD 80.68/b, while WTI gained 3.0% to USD 75.39/b.
• The reopening of the key North American pipeline, Keystone, has reportedly been delayed due to bad weather, and a timeline for the restart has not yet been confirmed. The pipeline was shut last week thanks to a spill.

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