In the last such announcement of the Biden Presidency, US CPI data released today shows that inflation in the US rose by 2.9% in the year to December. This compares to 2.7% in November and is a figure broadly in line with the market’s expectations.
Investment managers have been giving us their reaction to these US CPI data as follows:
Commenting on the inflation data, Colin Finlayson, investment manager at Aegon Asset Management said: “The US Treasury market (and global rates markets) breathed a sigh of relief as the US CPI contained few surprises – in fact the small miss on core CPI was cheered on by the market, pushing bond yields sharply lower. Headline CPI was 2.9% year-on year, bang in line with consensus but higher than the 2.7% reading in November.
“The small miss on Core CPI at 3.2% vs 3.3% – led by an easing back in core services prices – was welcome relief to investors after a relentless sell off over the last month. For a market living on its nerves, anything other than an upside surprise was a “win”.
“After the softer inflation data in the UK this morning, this has offered a crumb of support to bond market “bulls” and was a reminder that things other than fears over fiscal spending and term premia can drive Government bond markets. For the Fed, this keeps the path in rates still to the downside and has brought forward the pricing of the next cut from December – as it was after the recent employment report – to July.”
Oliver Faizallah, Head of Fixed Income Research at Charles Stanley, comments: “Following both the UK and US CPI numbers, there has been a bit of respite in both gilts and USTs. From the US, the Federal Reserve is no more likely to cut rates in January because of concerns over government policy, namely taxes and tariffs – and recent robust employment data. Overall, market expectations of a US rate cut at the end of the month still only sit at 2%, while market odds of a cut from the Bank of England in early February are sitting at 88%.
“There has been a lot of negative news building up over the past few months following Trump’s election in the US and UK Budget, so concerns around fiscal policy still linger. In the UK, it’s likely that the CPI miss is not a trend, and we could see it tick back up again. While in the US, concerns around an inflationary government policy and large deficits will likely keep yields elevated for some time.”
Hetal Mehta, Head of Economic Research, St. James’s Place says: “The US inflation data will come as a relief to a wide variety of policymakers – the Fed as well as the UK Treasury – as global yields move lower.
“Core inflation surprised on the downside and there are tentative signs that inflation pressures may have stopped building after months of acceleration. But headline inflation did tick up and more evidence of inflation moderation will be necessary to get the Fed comfortable with multiple rate cuts this year.
“We don’t think these data change our view of a soft landing, with growth moderating to a trend-like pace. The Fed has the firepower to cut rates if things do start to deteriorate materially.
“Overall, the outlook is still quite muddy as so much will depend on what the Trump administration comes up with policy wise (especially tariffs and immigration).”
Jochen Stanzl, Chief Market Analyst at CMC Markets said: “After strong quarterly figures from US banks, the inflation report is not standing in the way of a favourable trading day. We are now seeing falling rates precisely where the shoe pinches the most, namely in core inflation. This is exactly what the bulls on Wall Street were hoping for. The decline in core inflation is a relief, even if core inflation is still well above the Fed’s 2% target. However, even before the data, there was no longer any talk of multiple rate cuts by the Fed, which had already made it clear before Christmas that it wanted to be cautious about further rate cuts in 2025. Today’s inflation data is confirmation that the Fed is right to be cautious with its monetary policy, especially as there are no signs of concern on the jobs market.
“However, there is at least some hope that the only rate cut still hoped for in 2025 will not vanish. However, even after today’s data, the markets will probably continue to find themselves in a period in which they are adjusting to the fact that interest rates will remain higher for longer. The inflation data will, however, help to somewhat weaken this conviction. The danger for 5% yield in 10 year treasuries has diminished considerably with today’s weaker core CPI number.”
Patrick O’Donnell, Senior Investment Strategist, Omnis Investments
Core inflation came in lower than expected today. Following on from the UK release earlier on today, this should be taken positively by both the bond and equity markets. However, a significant reason for the rise in yields recently has been expectations about policies from the new incoming US administration and this print won’t change that narrative. Nonetheless, the fall in bond yields can extend from here after a significant rise in December. The next signpost for markets is likely to be the inauguration next week.
Daniele Antonucci, Chief Investment Officer at Quintet Private Bank (parent of Brown Shipley) believes the fact “that US inflation came in line with market expectations is a relief. Even a small upside surprise would have probably triggered extra anxiety among investors at a time when the bond market is already quite worried.
“Importantly, core inflation, which strips out volatile components such as food and energy, undershot some, though not all, polls or forecasters.
“This piece of data is likely to confirm the view that the Fed isn’t likely to cut rates again in the near term. We expect the central bank on hold at the January policy meeting and likely to wait for some time to lower rates, given the strength of the US economy. As there’s still significant uncertainty around the timing of any Fed move, the US bond market is likely to stay under pressure, especially as any fiscal stimulus might add to inflationary concerns.
“Because of this, and also taking into account that there’s a risk that the extra supply to US bonds might my tough to digest, we’re underweight US Treasuries, while we remain slightly overweight US equities as we think growth prospects and deregulation will be supportive.
“In fixed income, we prefer short-dated bonds in Europe where the European Central Bank is likely to cut more rapidly, given economic weakness.”
