In what’s proving a difficult moment to parse for global policymakers and investors alike, the Fed meeting will be preceded and likely influenced by the November consumer price inflation report on Tuesday. Consensus sees that ebbing another notch to 3.1%, though annual ‘core’ may be stuck at 4.0%.
Despite the punchy jobs number, disinflation momentum and inflation expectations continue to impress.
The University of Michigan’s latest survey on Friday showed consumers’ one-year inflation expectations plunged more than a point to 3.1% in December, the lowest reading since March 2021, and the 5-year view fell back below 3%. The New York Fed survey of consumer inflation expectations is due on Monday.
The upshot has been that markets have taken a pretty benign view overall of the latest sweep of numbers running into the Fed meeting. The labor market dampens recession fears without shifting the disinflation picture unduly.
With some $87 billion of 3- and 10-year U.S. Treasuries up for auction later on Monday too, 10-year yields backed up about 12 basis points to 4.24% after the jobs report on Friday and have held the line there today.
The Fed futures market has sobered up a little too since the employment report, with the chances of quarter-point cut as soon as March slipping back below 50% and two cuts not fully priced now until July. That said, there’s still almost 110bps of easing priced through the end of 2024.
But Wall St stocks saw Friday’s news as a glass as half full, with both the S&P500 and Nasdaq clocking closing highs for the year – and corporate junk bond spreads tightening to their lowest in three months. The VIX volatility gauge closed at its lowest since the before the pandemic, although it crept back a little higher on Monday.
Stock futures more generally show markets holding those gains before the bell later.
