PREVIEW: US CPI (Dec) to be released on January 15th at 13:30GMT/08:30EST

EXPECTATIONS: Headline US CPI is expected to rise +0.3% M/M in December, matching the November reading; the annual rate of headline CPI is expected to rise to 2.9% Y/Y from 2.7%. The core measure of CPI is expected to rise +0.2% M/M (prev. +0.3%), while the annual rate of core CPI is expected to remain unchanged at 3.3%.

INFLATION EXPECTATIONS: Some gauges of price pressures have been rising recently, causing some concern among analysts: the ISM Services PMI showed its prices index rising to 64.4 in December from 58.2, the first time the index has registered over 60 since January; the ISM Manufacturing PMI showed prices rising to 52.5 from 50.3 in December. Concerns about price pressures were crystalised after the University of Michigan's prelim data for January, which showed consumers' 1yr inflation expectations rising to 3.3% from 2.8%, while the 5-10yr measure rose to 3.3% from 3.0%. However, some have concerns about the quality of UoM's survey; Bloomberg market commentator John Authers notes that politics have left expectations wildly dispersed; "Michigan asks respondents for their party identification... 1yr inflation expectations among Republicans were higher than for Democrats throughout the Biden administration - that has all changed; Democrats are suddenly braced for 4% inflation, while Republicans say prices will rise by only 0.1%." The most recent NY Fed Survey of Consumer Expectations was more mixed; that data showed 1yr ahead inflation expectations unchanged at 3%, the 3yr ahead rose to 3% from 2.6%, while the 5yr ahead measure fell to 2.7% from 2.9%.

US PPI: The December PPI report was mixed ahead of the US CPI data, where it appeared soft on the headline and core metrics but a surge in airfares has upside risk for the PCE report on January 31st (two days after the FOMC on January 29th). Headline PPI rose +0.2% M/M (exp. 0.3%, prev. 0.4%), while the annual rate rose to 3.3% (exp. 3.4%, prev. 3.0%) The core metrics saw the monthly figure unchanged, despite expectations for a move up to 0.3% from 0.2%, while the annual measure was unchanged at 3.5% Y/Y after revisions (exp. 3.8%). Within the report, the PPI components that feed into PCE were mixed, where airline passenger services skyrocketed 7.2% M/M after declining 1.6% in November, potentially due to seasonal factors due to high demand over the holiday period. Meanwhile prices of portfolio management, physician care, home health and hospice care, nursing home care accelerated, while hospital inpatient care decelerated with outpatient care unchanged. Aside from the jump in airline services, the other components do not appear too concerning. In wake of the report, Capital Economics said it looks like core PCE prices rose at a rate of 0.27% M/M (prev. 0.1% M/M), while Pantheon Macroeconomics expects a 0.3% rise, both citing the jump in airline services. Regarding CPI, Pantheon Macroeconomics continues to look for an above-consensus increase in the headline and core CPIs tomorrow of 0.5% and 0.3%, respectively. However, the desk adds that "a run of better CPI and core PCE prints likely lies immediately ahead, provided the BLS correctly updates the seasonals and Mr. Trump holds back on immediately imposing new tariffs".

FED VIEW: Meeting minutes for the FOMC's December meeting revealed that although participants expect inflation to keep moving towards 2%, the effects of potential trade and immigration policy changes suggest that the process could take longer than previously seen; some said there was merit in keeping rates unchanged in December given the higher risks of persistently elevated inflation. This tone has been reflected in official Fedspeak too: the outlook for US rates will hinge on inflation progress, Fed Governor Waller has since said, base effects are likely to improve inflation dynamics this year; Fed Governor Bowman noted a lack of progress on inflation (she argued that the Fed should be cautious in considering changes to rates, and said that she supported the December rate cut as 'final step' in policy recalibration); while Fed's Schmid warned the last stage of getting prices back to 2% could be the most challenging for monetary policy; Fed's Collins, meanwhile, now expects more inflation relative to the recent past. Money markets have dialled back expectations of further cuts too, particularly in wake of the hot December jobs report. As it stands, markets only fully price in one 25bps rate cut for 2025, with just 29bps implied of easing throughout the year which fully prices the first cut by September, with just a 16% probability of a second rate cut by the end of the year.

JPM TRADING DESK SCENARIOS:

- Core CPI 0.30%+ - SPX loses 1-2%: "The first tail outcome with this outcome stemming from strong consumption and a potential move higher in housing prices."

- Core CPI between 0.23-0.30% - SPX loses 0.75-1.25%: "This hawkish outcome likely comes to fruition if Core Goods deflation flips to being inflationary and/or loss of disinflation momentum from housing."

- Core CPI between 0.17-0.23% - SPX gains 0.25-1%: This is JPM's base case scenario.

- Core CPI between 0.10-0.17% - SPX gains 1.0-1.5%: "This dovish outcome is likely achieved via a combination of cooler home inflation and an increase in the deflationary impulse from Core Goods."

- Core CPI below 0.10% - SPX gains 1.75-2.50%: "Similar to the previous bullet point, but you also likely see a reversal in categories experiencing recent gains such as Transportation."

15 Jan 2025 - 11:28- Fixed IncomeData- Source: Newsquawk