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Core US inflation slows, reinforcing “peak rates” view

Underlying US consumer inflation softened more than expected last month, essentially eliminating market-implied odds on one more move in the Federal Reserve’s tightening cycle, and sending global yields lower. According to data published by the Bureau of Labor Statistics this morning, the core consumer price index – with highly-volatile food and energy prices excluded – rose 4.0 percent in October from the same period last year, up 0.2 percent on a month-over-month basis. This was weaker than consensus estimates among economists polled by the major data providers ahead of the release – which were set at 4.1 and 0.3 percent, respectively.

A sharp deceleration in shelter costs played a big role, with September’s 0.6-percent month-over-month gain giving way to a smaller 0.3-percent move, and methodological quirks in the medical care index were less meaningful than expected, generating a relatively modest 0.3-percent monthly increase in the category.

On a headline all-items basis, prices flatlined on a month-over-month basis in October, up 3.2 percent over the previous year, and slightly below consensus forecasts. Americans paid 5 percent less at the gas pump in the month, used vehicle prices came down 0.8 percent, and airfares tumbled 0.9 percent.

Short-term Treasury yields are plunging as investors downgrade probabilities on a final hike in this tightening cycle – swaps are now implying sub-12-percent odds on a move in January – and pull rate cut expectations earlier in 2024. The dollar is lower against all of its major counterparts, and equities are surging – ironically threatening to undo some of the progress the Fed has made in lowering aggregate demand.

Bottom line: Today’s data bolsters our conviction in a Federal Reserve that is done hiking rates for this cycle, but we suspect that policymakers have little choice in sticking with a hawkish bias for many months yet – a stance which should keep pricing on rate cuts relatively stable, maintain implied policy rates in restrictive territory for longer, and raise the risk of a harder landing in early 2024.

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