As markets continue to navigate mixed expectations about the pace of Federal Reserve rate cuts, the so-called “Trump trade” continues to weigh on market sentiment and trader behavior. A razor-thin policy agenda, including tariffs, tax cuts, and a more relaxed regulatory environment, is keeping global market volatility elevated.
On Wednesday, consumer price data signaled a pause in U.S. inflation’s progress toward the target rate, highlighting ongoing inflation risks. The core Consumer Price Index (CPI), which excludes food and energy prices, rose by 0.3% in October for the third consecutive month, keeping the annual rate steady at 3.3%.
According to Bloomberg data, the U.S. core inflation gauge increased at an annualized pace of 3.6% over the past three months, marking the fastest rate since April. Additionally, headline CPI rose by 0.2% for the fourth straight month and by 2.6% year-over-year, up from the previous 2.4% and marking the first upward momentum in annual inflation since March.
A report from the U.S. Bureau of Labor Statistics showed that the shelter index increased by 0.4% in October, contributing more than half of the total monthly increase across all items. Meanwhile, the energy index was unchanged for the month. Recent inflation reports had reflected significant contributions from declining energy costs to the headline CPI.
Separately, the Producer Price Index (PPI) for final demand, released on Thursday, rose by 0.2% in October compared to the previous month and by 2.4% year-over year. Excluding volatile food and energy categories, core PPI climbed by 0.3% month-over-month and exceeded expectations with a 3.1% annual increase, compared to the forecast of 3%.
Economists closely monitor PPI trends for categories that feed into the Fed’s preferred inflation measure, the Personal Consumption Expenditures (PCE) Price Index. Following the recent PPI gains, some economists have raised their forecasts for the upcoming core PCE figures to 0.3%. However, others caution that heightened tariff risks could introduce more volatility into PPI data as businesses continue to manage supply chain pressures.
Meanwhile, a separate report released on Thursday showed that U.S. initial jobless claims fell to their lowest level since May during the week ending November 8. Initial claims declined by 4,000 to 217,000, below the median estimate of 220,000 in a Bloomberg survey of economists. Continuing claims, which reflect the number of individuals still receiving unemployment benefits, dipped to 1.87 million in the week ending November 2, down from 1.88 million. This suggests strong labor demand remains intact despite recent storms and labor strikes.
The recent U.S. inflation data, showing limited progress, combined with election results, has heightened uncertainties about the future trajectory of inflation and the Fed’s policy path. However, given the uneven nature of the fight against inflation, it is too early to conclude that a few weak data points have reversed the overall trend. Additionally, the latest figures reflect the effects of two hurricanes that recently impacted the U.S. economy. Against this backdrop, statements from Fed policymakers convey a cautious stance with a touch of optimism.
Speaking shortly after the data release, Minneapolis Fed President Neel Kashkari expressed confidence that inflation is moving in the right direction. Dallas Fed President Lorie Logan, however, emphasized the need for the Fed to proceed cautiously due to the risk of inflation remaining elevated.
Meanwhile, Fed Chair Jerome Powell, in remarks on Thursday, indicated no urgency to lower interest rates, stating that recent U.S. economic performance has been "remarkably strong." He noted that this strength provides the Fed with the flexibility to reduce rates at a measured pace. Powell’s comments aligned with those of his colleagues, reflecting a cautious approach toward rate cuts.
The U.S. economy continues to grow robustly, the labor market is cooling moderately, and inflation remains relatively steady. However, the economic impact of policies under the Trump 2.0 administration remains uncertain. This uncertainty, coupled with other economic variables, has led to growing expectations that the Fed might slow the pace of rate cuts.
Swap traders currently see a 58.9% chance of a quarter point rate cut at the December 18 meeting. However, expectations for the scale of rate cuts next year remain unclear, with economists predicting the Fed may pause rate reductions after December to assess the economic impact of Trump’s policies.
Markets remain focused on the likelihood of Trump implementing his promised policies, which continues to shape expectations for the Fed’s easing trajectory and keeps the U.S. dollar strong. Benchmark 10-year U.S. Treasury yields have risen to 4.45%, maintaining an upward trend. This, in turn, raises the opportunity cost of holding precious metals, keeping them under pressure. While global central banks’ easing cycles, robust central bank purchases, and safe-haven demand provide support for gold, the high yields and strong U.S. dollar are likely to keep weigh on prices.
Today, markets will closely watch Retail Sales data for further clues about the direction of U.S. inflation. Median forecasts suggest a 0.3% increase, following the previous 0.4% gain. A stronger-than-expected figure could further undermine rate cut expectations and strengthen the U.S. dollar. Conversely, a weaker-than-expected increase might cap dollar strength while offering some support to precious metals.