Latest economic data shows mixed signals: core inflation eased to 3.2% while employment remains strong, boosting expectations for a Fed rate cut in March. Markets are focused on the upcoming presidential transition, with Trump set to take office next week. Meanwhile, oil prices surge on sanctions, gold hits monthly highs, China achieves its 5% growth target, and Japan signals an imminent rate hike.
Market Pulse: Employment Surges, Inflation Softens, Fed's Next Move in Focus
Last Friday's surprisingly strong employment figures shifted the focus to this week's inflation report. Traders assessed the incoming data for further clues on the Federal Reserve's policy path, and price measures that rose less than expected slightly eased concerns about inflation.
According to a report released Wednesday by the U.S. Bureau of Labor Statistics, consumer prices in the U.S. rose less than forecast in December. The so-called core index, which excludes food and energy costs, increased by 0.2% after rising 0.3% for four consecutive months. On an annual basis, core inflation slowed to 3.2% from 3.3%.
Deceleration in medical care services and used car prices, which previously pushed the index higher, along with relative moderation in shelter cost increases, contributed to the softer monthly reading.
Meanwhile, the all-items index rose by 0.4% month-on-month, surpassing the 0.3% forecast. On a yearly basis, it climbed from 2.7% to 2.9%, as expected. The energy index jumped 2.6% in December, accounting for more than 40% of the monthly increase in the all-items index.
However, energy costs declined by 0.5% over the 12 months ending in December. The food index increased by 2.5% year-over-year.
Core inflation is often seen as a better indicator of underlying inflation trends compared to headline inflation, which includes volatile food and energy costs. Thus, although headline figures indicated continued price pressures, the slowdown in core inflation helped to somewhat ease inflation concerns.
Fed officials are likely to require a series of lower readings before considering rate cuts. Therefore, a cautious stance is expected to prevail at the monetary policy meeting later this month. However, when combined with last week's robust employment data, expectations for a 25-basis-point rate cut in March have increased.
Swap market data indicates a 68% probability of a quarter-point rate cut being priced in. Before the CPI report, traders did not expect a cut until June. Additionally, expectations for a total reduction of 34 basis points priced in for 2025 rose to 40 basis points following the data release.

The producer price index report released on Tuesday showed that several categories within the personal consumption expenditures (PCE) price index, the Fed's preferred measure of inflation, remained relatively subdued.
When combined with the consumer price index figures, some economists predicted that the PCE index, set to be released on the last day of the month, would rise by 0.2% month-on-month and could continue to edge lower over the next two months.
The PCE index gives less weight to shelter costs compared to the CPI index and thus trends closer to the Fed's 2% target. As a result, further easing in the PCE index at a pace consistent with the target could strengthen policymakers' rationale for easing rates during the Fed's March meeting.
Following the inflation reports, Fed officials welcomed the decline in price pressures but maintained a cautious tone. Richmond Fed President Tom Barkin stated that inflation continues to move toward the target but emphasized the need for rates to remain restrictive.
Fed Governor Christopher Waller, on the other hand, described the inflation figures as very positive and indicated that if the data remains favorable, the Fed could lower rates again in the first half of the year, supported market expectations.
Nevertheless, officials continue to highlight uncertainties that complicate forecasts for the Fed's policy path. In just a few days, Donald Trump will take office, and there is a general consensus that his policies could trigger inflationary pressures. Recent surveys reveal rising inflation expectations among both consumers and producers due to tariff concerns.
Chicago Fed President Austan Goolsbee remarked, "If the new president or Congress begins drafting policies that raise prices, we need to take that into consideration." Others noted that while such policies introduce significant uncertainty, it is too early to predict how they might impact Fed decisions.
In conclusion, markets are gearing up for critical days ahead, and Trump's statements or actions are likely to remain at the center of attention in the coming period. While easing inflation concerns have slightly weakened the U.S. dollar, ongoing uncertainties and anticipated policies may limit further losses for the currency.
Gold Hits Monthly Highs Amid Fed Speculation and Easing Inflation Concerns
Gold climbed to its highest level in over a month, trading above $2,720 per ounce, amid easing concerns about U.S. inflation and growing speculation that the Federal Reserve might act sooner than previously expected.
Following the release of U.S. inflation reports, yields on 2-year Treasury notes dropped to their lowest levels since the start of the year, while 10-year benchmark yields fell by roughly 20 basis points. Lower yields are typically favorable for non-interest-bearing assets like gold.
On the other hand, concerns surrounding Trump's policies persist, keeping the dollar near its highest levels in two years. A strong dollar diminishes gold's appeal and makes it more expensive for foreign buyers, potentially dampening demand. As such, if Trump maintains his aggressive stance on tariffs after taking office next week, the dollar's potential continued strength could exert downward pressure on gold prices.
Meanwhile, in the Middle East, an agreement was reached between Israel and Hamas to halt the war in Gaza, with a ceasefire expected to begin on Sunday. The reduction in geopolitical tensions may lower demand for safe-haven assets, adding further pressure on gold prices.
Oil Prices Surge as Sanctions and Winter Demand Take Center Stage
Oil prices surged to their highest levels since July this week, driven by new sanctions on Russian oil despite a ceasefire agreement that is set to halt the Gaza conflict for six weeks.
The rally was further supported by a report showing U.S. crude inventories had fallen to their lowest levels since April 2022 last week. As winter grips the Northern Hemisphere, cold weather is boosting heating demand, while risks to supply constraints continue to push oil prices higher.
Last week, the Biden administration imposed the toughest restrictions yet on Russian oil. Meanwhile, expectations for the incoming Trump administration, set to take over in a few days, remain somewhat mixed.
Trump's advisors are reportedly drafting a comprehensive sanctions strategy aimed at facilitating a Russia-Ukraine ceasefire, while Iran and Venezuela also face continued sanctions. Additionally, Trump recently hinted at plans to impose a 25% tariff on Canadian oil.
On the other hand, Trump has plans to encourage domestic production. During his presidential campaign, he summarized his energy policies with the slogan "drill, baby, drill." However, even if Trump moves forward with these policies, ramping up local production will take time.
Therefore, some economists argue that Trump is unlikely to rush into imposing tariffs and sanctions. Goldman Sachs analysts, assuming Trump would prioritize lowering U.S. energy prices, have maintained their oil price forecasts.
Consequently, if concerns about supply constraints ease, the upward pressure on oil prices may diminish. Oil traders will continue to closely monitor any potential statements or actions from Trump.

China's Growth Triumph and Japan's Monetary Shift in Focus
China's economy reached its 5% growth target after Beijing's stimulus measures accelerated economic activity in the final quarter. Data released on Friday showed that China's gross domestic product (GDP) grew by 5% in 2024 compared to the previous year, surpassing the median forecast of 4.9% from economists surveyed by Bloomberg.
On a quarterly basis, growth reached 5.4% in the fourth quarter, up from 5.3%, 4.7%, and 4.6% in the first three quarters, respectively, ensuring the annual target was met.
Exports were the brightest spot for China's economic activity in 2024, with fourth-quarter growth particularly bolstered by front-loaded shipments triggered by Trump's tariff threats.
This suggests that if Trump follows through on his promised tariff increases, China's economy could face greater challenges ahead, forcing the government to ramp up stimulus measures to support domestic demand.
Beijing has pledged further monetary easing and stronger public spending for this year. However, the People's Bank of China's (PBoC) growing commitment to defending the yuan has raised concerns that the economy may lack sufficient liquidity support.
Economists argue that for the PBoC to effectively ease policy and stimulate domestic demand, it may need to accept a depreciation of the yuan. Some predict this could happen, with estimates suggesting the yuan could drop to around 7.5 if Trump imposes a 20% tariff, and fall further toward 8.0 if a 40% tariff is enacted.
Across the waters, expectations for a rate hike by the Bank of Japan (BoJ) later this month have surged. BoJ Governor Kazuo Ueda expressed growing confidence in wage increases on Wednesday, following remarks from his deputy, signaling that a rate hike decision could come as soon as next week. BoJ policymakers are set to meet on January 23-24 to decide.
After Ueda and his deputy's comments, swap markets priced in a 99% probability of a hike, up from 71% on Wednesday. These expectations have propelled the Japanese yen to its highest levels against the U.S. dollar in a month. While uncertainties surrounding Trump's policies continue to weigh on markets, the BoJ's hawkish stance could provide tailwinds for the yen to sustain its gains.
Boost Your Trading in 2025 with Duhani Capital
Duhani Capital offers a 30% deposit bonus and swap-free trading to empower traders amid market volatility. With global uncertainties like U.S. attacks and labor strikes impacting markets, this promotion provides financial flexibility and strategic opportunities. Don't miss the chance to trade cost-effectively and maximize your investment potential.