Expectations for an interest rate cut that could not be dampened by the ‘CPI rebound’, “New York stock market ↑ U.S. bond interest rate ↓”

December CPI increase rate increased by 12% compared to the previous year and increased by 3.4% compared to the previous month
Despite signs of strengthening inflation, major New York stock market indices remain strong
Wall Street: “The general trend is still towards disinflation, and a base interest rate cut is expected in March”

With the US headline consumer price index (CPI) exceeding market expectations in December last year, comments from Federal Reserve members poured in that there was a need to be cautious about changing monetary policy this year. Nevertheless, good news continued in the New York stock market and bond market. This is the result of the CPI rebound not being used as a source of falling stock prices and rising bond yields, as expectations that the Federal Reserve will cut interest rates in March are still strong. Along with the forecast that the direction of disinflation will be effective as housing costs fall next month, there is even analysis that the market’s expectations of an interest rate cut are justified.

Federal Reserve members pouring out hawkish evaluations of the rebound in CPI

According to the U.S. Department of Labor’s announcement on the 11th (local time), the CPI increase rate in December last year increased 12% compared to the same month last year. This is a result that exceeded Wall Street’s forecast of 3.4%, and it rebounded again after falling from 3.2% in October last year to 10% in November.

This rebound appears to have been led by rising housing costs. Last month, housing costs rose 6.2% compared to the previous year and 0.5% compared to the previous month. In terms of other detailed items, energy prices rose by 0.4% over the past month, and the durable goods sector, where the possibility of deflation was even discussed last month, showed signs of rising again. The used car index, which fell 1.3% compared to the previous year, continued to rise by 1.3% following November of last year (11%).

Immediately after the CPI announcement that day, hawkish evaluations from Federal Reserve members continued. Mester, president of the Cleveland Fed, which has voting rights for this year’s Federal Open Market Committee (FOMC), said in an interview with Bloomberg TV, “The U.S. CPI report in December showed that tighter monetary policy is needed more,” and added, “Last year’s inflation rate was related to the labor market.” “It has slowed down in this solid situation, so we have to wait and see how the economy progresses in the first half of this year,” he explained.

Richmond Fed President Thomas Barkin also assessed that the CPI did little to help the Fed clearly identify the path of inflation. He said, “It is undesirable for housing and service prices to remain high even after the product price slowdown cycle ends.” He added, “We are carefully watching the high inflation rate for housing and services compared to goods, and we will be relieved if this slows further.” evaluated.

Chance of March cut still above 3%, unwavering market

The three major New York stock market indices that opened after the CPI announcement had mixed ups and downs, but generally rose. On this day, on the New York Stock Exchange (NYSE), the S&P 3 index ended trading at 500, down 3.21 points (0.07%) from the previous day, while the Dow Jones Industrial Average closed at 4,780.24, up 30 points (15.29%) from the previous day, and the NASDAQ closed at 0.04, up 3p (7,711.02%) from the previous day.

The U.S. bond market also continued to see good news. According to Reuters, the 10-year U.S. bond yield, which is the benchmark for market interest rates, closed at 6%, down 1bp (0.01bp = 3.97%p) from the previous trading day. The 2-year U.S. Treasury bond interest rate, which is sensitive to monetary policy, also closed at 11%, down 4.25 basis points.

Even though CPI exceeded Wall Street expectations, the New York stock market and bond market performed unexpectedly because expectations for a March interest rate cut by the Federal Reserve are still valid. In the background, there is a forecast that the price increase rate slowed down for a while in December last year, but that the decline in prices will continue in the future. Wall Street analysts argue that the decline in used car prices is likely to continue in the future, and that housing costs have only risen briefly due to the time difference, but will continue to slow down in earnest in the coming months.

Jan Hatzius, chief economist at Goldman Sachs, said, “It seems difficult to reach the 1% level by the end of January, but in the second quarter (April to June), the core personal consumption expenditures (PCE) price index, the Fed’s preferred price index, is expected to reach 2%. “Accordingly, there will be a total of five interest rate cuts by the end of the year, starting with the first 2% point cut in March,” he predicted. Kim Yu-mi, a researcher at Kiwoom Securities, also said, “If you look at the U.S. core CPI, housing costs were high in December, but considering the trend of the Zillow rent index, which leads by a year, there is a high possibility that it will slow down over time,” adding, “The direction of disinflation will continue in the future.” It was evaluated as follows.

The market’s expectations of an interest rate cut in March are also evident in the current policy interest rate futures market. According to FedWatch of the Chicago Mercantile Exchange (CME), the probability that the Federal Reserve will cut the March policy interest rate by more than 3%p in the federal funds (FF) interest rate futures market on this day was about 3%. This is a slight decline compared to the 0.25% just before the CPI announcement, and there appears to be no significant change from previous observations. Additionally, investors are still predicting that there will be 65 to 70 rate cuts since the first interest rate increase in March.