Markets Double Down On March Rate Cuts Despite December CPI Surprise

Rates drop 10+ bps at the short-end of the curve as traders shrug off slightly higher-than-expected CPI. Today’s CPI data showed that the path toward sustained 2% inflation may be more challenging than expected, but traders largely viewed the results as a sign that inflation is still trending in the right direction. Though UST yields jumped ~6 bps higher immediately after the data, they declined across the curve throughout the afternoon, closing 3-11 bps lower on the session. Futures now suggest a stronger chance of both a rate cut at March’s FOMC meeting (~78%) and six rate cuts by the end of 2024. The chart below illustrates how mounting rate-cutting bets have driven swap rates down 70 bps – 90 bps across tenors since last October’s multi-year peak. 

December inflation exceeds estimates, but core inflation continues to decline. December CPI results met or exceeded estimates across most measures, largely driven by increases in housing, services and core goods prices. Shelter costs rose 0.5% on the month, service prices climbed 0.4%, and core goods inflation was partly driven by higher used car and apparel costs. Though December’s results raised concerns that the Fed faces a bumpy road to sustainable 2.0% inflation, core CPI was unchanged MoM at 0.3% and logged a 6th straight month of flat or declining prints on a YoY basis.

Fed President Mester suggests that March is too early for rate cuts. Following today’s CPI data, 2024 Fed voter Mester argued against cutting rates as early as March. She stated, “I think we need to see some more evidence… I think the December CPI report just shows there’s more work to do, and that work is going to take restrictive monetary policy.” Thomas Barkin offered similar sentiment, as he commented, “What I am looking for is conviction around inflation returning to our target.”