Markets brace for crucial November CPI data ahead of next week's Fed meeting, with economists expecting a 0.3% monthly rise and 2.7% annual inflation. While an 86% probability of a rate cut remains priced in, Trump's upcoming presidency adds uncertainty to the 2025 outlook. Meanwhile, gold surges above $2,700 amid rate cut expectations and Chinese buying, though bond investors maintain cautious positioning ahead of key policy decisions.
Inflation Data as a Game Changer: How It Could Shape the Fed's Next Moves?
The focus of global markets today will be on the Consumer Price Index (CPI), which will provide another perspective on inflation ahead of the Federal Reserve's meeting next week. Traders will analyze whether the progress in U.S. inflation has continued to stall and assess how the incoming data might influence the Fed's policy path.
Economists surveyed by Bloomberg predict that the November inflation report will show a solid increase for the fourth consecutive month. This would indicate that the U.S. inflation rate's progress toward the Fed's 2% target has paused.
According to the median estimate of economists surveyed, the CPI for all items likely rose by 0.3% compared to the previous month. The report, to be released by the U.S. Bureau of Labor Statistics (BLS), is also expected to show that annual headline inflation increased from 2.6% to 2.7%.
Meanwhile, forecasts suggest that so-called core inflation, which excludes food and energy costs, will rise by 0.3% month-on-month while maintaining an annual increase of 3.3%.
The data released today will be the final inflation figures for the Fed to consider before its year-end meeting. Traders largely expect policymakers to favor an additional quarter-point rate cut. Swap market data shows that the decision for a third consecutive rate cut is priced in with an 86% probability.
The November inflation figures will also shed light on expectations for the Fed's policy trajectory in 2025. Strong inflation readings in recent months have bolstered the belief that the Fed will slow the pace of rate cuts next year. Similar data today is likely to reinforce this sentiment.
On the other hand, a key factor driving this belief is the expectation that tax cuts and tariff policies anticipated under Donald Trump's administration---set to take office next month---will reignite price pressures. A report released yesterday by the BLS showed that U.S. third-quarter labor costs rose less than initially estimated, providing evidence that the labor market is no longer a source of inflationary pressure.
Taken alongside last week's data suggesting a moderate cooling in the job market, it remains plausible that a "soft landing" scenario for the U.S. economy is still intact. However, Trump's election victory has added uncertainty to this outlook, strengthening expectations that the Fed will slow its rate cuts next year.
Post-election surveys indicate rising confidence among both businesses and consumers. A report published on Tuesday showed that a measure of business optimism reached its highest level since June 2021, driven by expectations of more favorable economic policies under the Trump administration.
Similarly, a measure of consumer confidence climbed to its highest level since April. However, inflation expectations for the coming year have hit a five-month high, with consumers anticipating a 2.9% inflation rate for 2025, driven by price pressures expected from tariffs.
It remains uncertain how many of Trump's promised policies will be implemented or when they will take effect after he officially takes office. However, the expectation of higher prices has prompted American consumers to stock up before prices rise, according to a survey released earlier this week. Additionally, about one-third of businesses reported plans to increase prices in the next three months due to tariffs, the highest proportion since May.
In summary, both economists and U.S. consumers and business owners see a heightened risk of inflation in the period ahead. Today's data, unless it deviates significantly from expectations, is unlikely to stop the Fed from delivering a quarter-point cut at next week's meeting, though plenty of evidence supports a slower pace of policy easing starting next year.
Under this scenario, an inflation reading supportive of next week's rate cut could place some pressure on the dollar, but expectations for the future are likely to limit this impact.
Gold Soars Above $2,700: Inflation Data and Fed Decision Loom Large
As traders await the final inflation data before the Fed announces its December decision and projections for 2025, gold prices extended their three-day rally, surging above $2,700 per ounce.
The rise was fueled by increasing expectations of a quarter-point rate cut next week, as well as the Chinese central bank resuming gold purchases after a six-month pause and geopolitical tensions in Syria.
JPMorgan Chase & Co.'s weekly survey on Tuesday revealed that bond investors have exited long positions and adopted a neutral stance ahead of the Fed's decision. Long positions in U.S. Treasury bonds recorded their strongest increase of the year over the past two weeks, following the waning of the 'Trump trade' effect. This caused Treasury yields, which had climbed to around 4.5%, to decline, thereby reducing gold's opportunity cost and enhancing its appeal.
However, the shift to a neutral stance among bond investors could limit gold's upward momentum. Following this week's data and next week's Fed meeting, if expectations grow that the Fed will slow the pace of rate cuts, a stronger U.S. dollar could once again weigh on gold prices, keeping downward pressure in play.
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