Core CPI Decelerates In December

Yields plummet following soft inflation print. Consumer inflation slowed from November to December, the first month of year-over-year deceleration since July. Yields declined 3-15 bps as a result, with most of the move occurring just after the data release this morning. Markets expect that the relatively cool inflation data could drive the Fed to cut rates earlier than originally expected; Fed Funds futures now have a 25bp rate cut fully priced in by July versus October as of yesterday’s close. Meanwhile, equities surged on increased optimism for earlier rate cuts, with the S&P 500 and NASDAQ up 1.83% and 2.45%, respectively.

CPI delivers another win for doves. Today’s data showed that core CPI declined in December. While headline measures were in line with expectations of an increase vs. November, month-over-month and year-over-year core CPI growth both landed under surveyed estimates and declined from November. The month-over-month decline was the first since last May, driven by lower lodging costs and more muted growth in medical care services and rent prices. Following yesterday’s cooler PPI data, today’s release was an encouraging sign that inflation progress hasn’t necessarily stalled. Still, the Fed is unlikely to dramatically change the tone it set at its December meeting until additional data supports a longer-term disinflationary trend.

Treasury Secretary Yellen warns against Trump tax cut extensions. Janet Yellen warned against tax cut extensions today, citing concerns about the growing fiscal deficit. She labelled the projected fiscal path “not sustainable… and the consequences of inaction, or action that exacerbates projected deficits, could be dire.” Many of Trump’s tax cuts are set to expire at the end of 2025, and according to analysis from the Congressional Budget Office (CBO), extending the cuts for the next 10 years would add $4.6 trillion to the federal deficit.