Soft Inflation Figure Pulls Rates Down Dramatically

CPI eradicates hike bets, bonds soar. Today’s weak CPI print potentially put the nail in the coffin for incremental rate hikes, and Fed Funds futures now project a 0% probability for hikes in December and beyond. In fact, a cut is seen as more likely than a hike by the end of January, a stark contrast from yesterday’s 30% hike odds. Price action in swaps reflected the sentiment, as rates dropped ~20bps across most of the curve and reached multi-month lows.

CPI inflation declines across all categories. October CPI was below expectations and last month’s figures across measurements. Notably, headline inflation growth declined to 0.0% on a MoM basis. Excluding housing and energy, service prices rose 0.2% MoM, the lowest in nearly 2-years. Core goods prices also notched a 5th consecutive month of declines, providing continued relief to consumers. Looking ahead, labor market strength may be the key to determining when the Fed will reduce policy rates. For now, the labor market has remained strong, even as inflation has declined.

PPI up next. As Jamie Dimon pointed out today on Bloomberg TV, inflation “might not go away that quickly,” and an inflationary pressure rebound is possible despite today’s progress. PPI is next on the inflation data slate, and forecasts call for PPI figures to decelerate significantly from September, while core figures should remain flat.