December hiking a done deal for the Fed
The October CPI report delivered an upside surprise that we warned was a risk pre-release.
Headline prices rose 0.4% MoM last month against a 0.3% consensus, albeit slowing from September’s 0.6%, while core printed 0.3% for a third consecutive month when markets looked for 0.2%. No annual rates were published given the lingering impact of last October’s shutdown, leaving the monthly figures to carry full weight. But for those FOMC members worried about inflation momentum, core inflation is now running at roughly 3.7% on a three-month annualised basis, up from 3.4% in September, while supercore price growth rose from 4.6% to 5.5% 3m/YoY.
The finer details are unlikely to offer the Fed much comfort either, despite energy price growth calming, with gasoline up 1.0% after a 9.1% surge in September.
But as we argued over the weekend, a quieter headline makes it harder to dismiss signs of energy costs bleeding into wider prices. On that score, transportation services rose 0.8%, food climbed 0.5% after a flat September, and core goods excluding used cars gained 0.4%, the most since January. By our calculations, monthly supercore printed at 0.41%, little changed from the 0.43% seen previously. Granted, shelter eased to 0.3%, and a 1.2% drop in used car prices flattered core, but neither alters the picture of broadening price pressures.
That matters all the more following Governor Waller’s speech in London this morning. In it, he backed a 25bp hike on December 9th regardless, adding that a 50bp move “should be considered” if core came in around 0.3% or higher.
We are a little sceptical and suspect a majority of Fed voters will also prove more cautious. Nevertheless, with a quarter-point rise to 4.00–4.25% near fully priced ahead of today’s release, the December FOMC debate is now squarely focused on size, not direction. November payrolls on December 4th are the last major hurdle, with November CPI due the day after the decision.
For FX, the dollar had already recovered early losses on Waller’s remarks, with gains accelerating post-CPI.
Two-year Treasury yields are now some 12bp higher at around 4.68%, although, with markets sharing our doubts over the likelihood of a 50bp December move, dollar gains have proven more muted, with the DXY index only threatening 102 as of writing. Still, that has been enough to see EURUSD back below 1.12, with cable sub-1.34. Any extension of dollar length from here is now likely to rest on Middle East tensions and AI concerns, at least in the near term.