Slowing Core Inflation

Today’s US CPI inflation release is the highlight event of the week for many traders and investors. Bloomberg’s median estimate for headline inflation suggests we can expect a slight uptick to 3.2% in the twelve months to December, up from 3.1% in November. The estimate range falls between 3.6% and 3.1%, with an average estimate of 3.23%. Year-on-year core inflation for the month of December, on the other hand, is expected to slow to 3.8%, down from 4.0% in November, with an estimate range between 4.0% and 3.7% and an average estimate of 3.85%.

Bloomberg

Slowing inflationary pressures would help add evidence to the Fed’s case to begin cutting in the first half of this year and perhaps tip the scales in favour of a March cut. A resurgence in price pressures, however, could have rate-cut projections nudged further out in 2024. If inflation pressures begin to gather steam, options for the Fed would be few and far between aside from leaving the Fed Funds target range in restricted territory, a move that could bolster the buck and pressure stocks.

You may recall that the Fed projected three rate cuts at December’s policy meeting, effectively bolstering the notion of further rate cuts this year. Interestingly, markets are pricing nearly double this at six rate cuts, with March’s meeting to potentially see the first 25bp cut as of writing.

However, while there are likely to be substantial rate cuts this year, March is unlikely to be the meeting where we see a cut in the Fed Funds target range. Last week’s spirited jobs report showed that the US economy added more than 210,000 new payrolls, and the unemployment rate remained unchanged at 3.7%, defying market expectations of a slight uptick to 3.8%. Couple this with resilient economic growth—the third estimate for Q3 GDP came in at 4.9%—this shows limited need for an immediate rate cut on the side of the Fed.

Market Snapshot

A miss for today’s US CPI—particularly one that breaches the lower boundary of the estimate range —would provide evidence to consider shorts in the USD; conversely, better-than-expected numbers would likely underpin the buck and observe traders reprice rate-cut forecasts. The US Dollar Index has not really offered much volatility this year so far, largely consolidating after price rejected the underside of resistance on the daily timeframe at 102.92. Ultimately, the buck has been trending lower since October 2023 and recently pencilled in a Death Cross (50-day SMA crossing below the 200-day SMA – signalling a longer-term downtrend could be on the table). Should sellers enter the fray, daily support falls in at 101.77.

In the commodities space, spot gold (XAU/USD) remains on the back foot this week, down -0.7% and is poised to end a third consecutive week in negative territory. A miss on US CPI could bolster the case for a bid in spot gold to potentially retest the mettle of nearby resistance at $2,075; a break north of here could also lead to the precious metal approaching the all-time high of $2,148. On the other hand, a beat on the US CPI could weigh on the yellow metal and draw things back to the widely watched $2,000 level. Ultimately, though, the price of gold is in an uptrend and dip-buying from $2,000 could also be on the table.

The S&P 500 is having a cracking week, defying RSI (Relative Strength Index) negative divergence on the weekly timeframe and last week’s weekly Evening Star candlestick formation. Resistance at 4,743 is all but done and dusted, it would appear, with little stopping the index from reaching the all-time high set in January 2022 at 4,818. Therefore, a miss on US CPI today may strengthen the case for bulls here and eventually refresh all-time highs. Do bear in mind, though, that a retest of the breached resistance at 4,743 could also be seen to draw in fresh dip-buying.

Charts: TradingView

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