US core CPI up 4.0% y/y, in line with market expectations but not weak enough to encourage the market to price in any more easing next year

Overnight, there has been a little market volatility around the US CPI release, but net market movements have been modest following the in-line result, slightly disappointing a market that wants to see better figures to justify much easier monetary policy next year. US equities, the USD and US rates are all pretty flat. The NZD is currently 0.6120, down a little overnight and up a little from this time yesterday.

US CPI inflation ticked higher in November, with the headline rising 0.1% m/m and the core (ex-food and energy) rising 0.3% m/m. Annual headline inflation ticked down to 3.1% and core annual inflation was steady at 4.0%. The figures were in line with expectations, but the market was hoping for a softer result to justify the series of rates cuts priced for next year. Importantly, services inflation showed signs of stickiness, with the services index excluding housing and energy up 0.4% m/m.

The data comes ahead of the Fed’s next policy announcement in just over 24 hours. Policy will highly likely remain unchanged and the Fed is unlikely to give a signal that rates cuts are currently being talked about, or sanction the scale of easing priced for next year. Rates and the USD were jumpy around the release, but the net change has been little impact on rate expectations, with the market still pricing the first full rate cut in May next year and 112bps of easing through 2024. US 2-year and 10-year Treasury yields are slightly higher compared to the pre-CPI levels, but show only small net movements for the day. The 10-year rate is currently 4 24%, a couple of bps higher since the NZ close.

Speaking after the release, US Treasury Secretary Yellen talked about inflation, saying “It’s certainly meaningfully coming down. And I see no reason, on the path that we’re currently on, why inflation shouldn’t gradually decline to levels that are consistent with the Fed’s mandate and targets…I personally don’t see any good reason to think that the last mile is going to be especially difficult.” She wasn’t drawn into Fed policy but noted that falling inflation means real interest rates, which are adjusted for inflation, are rising even as the Fed holds nominal rates steady.

In other key economic news, UK wages inflation slowed further, with weekly earning ex bonuses up 7.3% y/y for the three months to October, with the monthly figure showing a larger moderation to 6.3%. The figures encouraged the market to bring forward and add scope for BoE rate cuts next year, with the first cut now fully priced for June. The UK 2-year and 10-year gilt yields fell in the order of 10-11bps, a greater fall than seen in other markets, but there was no net damage to GBP.

The USD is up slightly from its pre-CPI level, but is still net weaker for the day after it drifted lower heading into the release. In the aftermath of the release, the NZD traded a range of 0.6105 to 0.6170, before settling at 0.6120, a small loss overnight but a small gain from this time yesterday. NZD cross movements have also been modest. The AUD has been on the weaker side of the ledger, down to 0.6550, seeing NZD/AUD drift up to 0.9345.

Yesterday, the domestic rates market was quiet, with rates mostly lower. NZGBs showed a small flattening bias, with the short end anchored and 5 to 10-year rates down 1-2bps. Swap rates fell 3-4bps, with the 2-year rate down to 5.17% and the 10-year rate down to 4.73%.

Net migration remained very strong, with 7.8k in October and a record 129k for the year. Chunky upside revisions continued, with the September year figures up over 6k from the initial estimate. With the RBNZ recently becoming a lot more concerned about the inflationary implications from the extra demand that more people create relative to the supply side expansion via the labour market, the new data can only add to those concerns. The market didn’t seem too perturbed, as evidenced by the 4bps fall in the 2-year swap rate by the end of the day.

In the day ahead, there are a number of domestic releases before lunchtime, including REINZ housing market data, current account data and monthly pricing indicators. The latter are the most important and will help firm up our estimate for Q4 CPI. On the global calendar, only second tier data are released, with the pick of the bunch being US PPI data.