Inflation data was front and center this week. Thursday’s Consumer Price Index (CPI) report came in slightly hotter than expected, rising 0.2% month-on-month and 2.4% year-on-year, with the core measure (excluding food and energy) rising 0.3% and 3.3% respectively. The upside surprise was somewhat overshadowed by a spike in weekly unemployment claims, to 258,000, although this was likely due to autoworker layoffs and hurricane-related impacts in the Southeast.
Producer Price Inflation (PPI) data on Friday came in line with expectations, with the core measure rising 0.2% month-on-month and 2.8% year-on-year. Components of both the CPI and PPI that feature in the Fed’s preferred gauge, the Personal Consumption Expenditure (PCE) index, suggest that inflationary pressures remain benign.
Perhaps of most interest this week were the minutes from the September Federal Open Market Committee (FOMC) meeting published on Tuesday which highlighted a robust debate over the magnitude of the last 50 basis point (0.50%) cut which came as a surprise for many market participants. While a substantial majority of FOMC members supported it, there were arguments for 25 basis points to avoid signaling a rapid pace of easing ahead which others apparently could have supported. We expect the Fed to be more measured in future meetings, with the recent rebound in labor market data supporting our view that the US consumer and economy is in good shape.
Treasury yields ended the week higher again, with the 2-year at 3.95% and 10-year at 4.10%. Both have risen by around 40 basis points in the past month following stronger than expected economic data and higher oil prices. The market is now pricing in a more realistic assessment of future interest rates, in our opinion, with Fed Funds expected to fall from 5.00% currently to around 3.40% by December 2025.
Next week: Retail Sales, Industrial Production, NAHB Housing Market Index, Housing Starts, Building Permits
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