12/13/24: Inflation Trends, Fed Rate Cut Expectations, and Treasury Yields Rise

Inflation data took center stage this week with the release of the November Consumer Price Index (CPI) on Wednesday and Producer Price Index (PPI) Thursday.

CPI came in at 0.3% month-on-month and 2.7% on a year-on-year basis. Excluding the more volatile components of food and energy, ‘core’ CPI came in at 0.3% month-on-month and 3.3% year-on-year. While core CPI inflation has reaccelerated in the last few months and remains elevated, the underlying drivers are more benign with the increase driven by goods rather than services which have been stickier. Indeed, the largest and most persistent component of service inflation, rents, continued to decelerate to the lowest level since early 2021 in November which will provide comfort to the Fed.

The PPI came in at 0.4% month-on-month and 3.0% on a year-on-year basis. Excluding food and energy, the core PPI came in at 0.2% month-on-month and 3.4% year-on-year. Recall that certain components of both the CPI and PPI feed into the calculation of the Personal Consumption Expenditure price index, or PCE, which is the Fed’s preferred inflation measure. After both sets of data this week, market participants expect a benign PCE result for November to be released later in the month.

Overall, the inflation data should not have materially impacted the Fed’s calculus as they approach the last meeting of this year next Wednesday, December 18th. We expect the Fed Funds rate to be lowered by 0.25% again to a target range of 4.25-4.50% but for the Fed to signal a slower cadence of cuts for 2025 in its Summary of Economic Projections release and during Chair Powell’s press interview following the announcement.

Treasury yields rose modestly during the week with the 2-year note up approximately 10 basis points to around 4.20%, and 10-year up 25 basis points to approximately 4.40% at the time of writing. As the Fed continues to ease throughout 2025, we expect the yield curve to steepen further.

Next week: S&P Global Manufacturing PMI, Retail Sales, Industrial Production, NAHB Housing Market Index, Building Permits, Housing Starts, FOMC Rate Decision, Third Quarter GDP Update, Leading Index, Existing Home Sales, Personal Consumption Expenditure (PCE) Index, University of Michigan Sentiment Index

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