CPI Watch
- The US December CPI print will likely show that progress on inflation is stalling.
- UK inflation cools in December. GBP rallies as stagflation risk abates.
- Bank Indonesia delivers a surprise 25bps rate cut to 5.75% vs. no change expected. IDR falls across the board.
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USD is extending recent losses triggered by speculative report on US tariffs and softer than expected US PPI inflation. Headline PPI rose 3.3% y/y (consensus: 3.5%) vs. 3.0% in November while core PPI was steady at 3.5% y/y (consensus: 3.8%). PPI services ex-trade, transportation, and warehousing - which feeds into the core PCE calculation – fell to a 13-month low at 3.9% y/y vs. 4.5% in November.
Today’s US December CPI data will offer a clearer picture of the inflation backdrop (1:30pm London). Headline CPI is expected at 2.9% y/y vs. 2.7% in November and core CPI is expected at 3.3% y/y vs. 3.3% in November. Recent data have raised the possibility that progress on inflation may be stalling well above 2%. Indeed, the Cleveland Fed’s Nowcast model forecasts January headline and core CPI at 2.8% y/y and 3.2% y/y, respectively. Moreover, the FOMC December 17-18 meeting minutes noted that “almost all participants judged that upside risks to the inflation outlook had increased.”
Sticky US underlying CPI inflation will strengthen the case for a shallow Fed easing cycle and underpin the USD uptrend. Fed funds futures imply just one 25bps cut in 2025 while the FOMC has two 25bps cuts penciled-in. The Fed’s December Beige Book is the other highlight today (7:00pm London) along with a handful of Fed speakers: Barkin, Kashkari, Williams and Goolsbee.
GBP is firmer on cooler UK inflation in December. Headline CPI eased to 2.5% y/y (consensus: 2.6%, BOE projection: 2.5%) vs. 2.6% in November and core CPI dropped more than expected to 3.2% y/y (consensus: 3.4%) vs. 3.5% in November.
The Bank of England (BOE) will be particularly encouraged by the sharp drop in services CPI to a 33-month low at 4.4% y/y vs. 5.0% in November. The BOE projected services CPI at 4.7% y/y in December while the markets expected 4.8% y/y. Bottom line: the risk the UK enters a period of stagflation has diminished which should cushion the decline in GBP and ease the sell-off in gilts.
Right on schedule, BOE MPC member Alan Taylor delivers a speech titled “Inflation Dynamics and Outlook” (4:30pm London). Taylor was one of three MPC members to support a 25bps rate cut at the December meeting when the majority voted to keep rates steady at 4.75%.
EUR/USD is holding on to recent gains above 1.0300. Eurozone industrial production is expected to remain sluggish in November (10:00am London). This will support the case for additional ECB rate cuts toward the lower-end of its neutral range estimate of around 1.50% to 3.00%. Markets expect the ECB policy rate to bottom between 2.25% and 2.00% over the next 12 months from 3.00% currently.
JPY is outperforming. Bank of Japan (BOJ) Governor Kazuo Ueda hints at a possible rate hike next week. Ueda pointed out he heard many encouraging views on pay at the BOJ’s recent branch managers’ meeting. Following his comments, odds of a BOJ rate hike at the January 24 meeting increased to over 70% from 60% yesterday. We expect the BOJ to wait until March to resume normalizing rates as wage trend will be clearer by then.
IDR fell across the board after Bank Indonesia unexpectedly cut the policy rate 25bps to 5.75%. Consensus was looking for no rate change due to ongoing rupiah weakness. Instead, Bank Indonesia noted the decision to cut rates was in line with low inflation expectations and the need to support economic growth.
