CPI Surprises to the Downside

STOCK INDEX FUTURES

The indexes are higher after November’s CPI inflation report came in well under expectations, heightening expectations that the Fed could have the go-ahead to lower rates with less caution in 2026. Consumer prices rose 2.7% year-over-year in November, well below forecasts of 3.1% and a drop below September’s 3.0%. Core prices rose 2.6% year-over-year, below forecasts and September’s reading of 3.0%. Meanwhile, weekly jobless claims came in at 224,000, while the previous figure was revised slightly higher to 237,000.

The tech sector is looking to get a reprieve from yesterday’s rout as chipmaker Micron posted strong results that eased some fears that the AI spending boom will fizzle out. Micron’s earnings topped analyst estimates and earnings targets, and the company issued stronger-than-expected guidance. The results could help soothe market worries for the time being as investors have become anxious over high valuations and massive spending commitments. The tech sector faced a rout yesterday as Oracle fell over 5% after reports that its largest data center partner, Blue Owl, refused to back the company’s plan to build a $10 billion data center. Nvidia fell around 4%, AMD fell 5.3%, and Broadcom fell 4.5%. However, the energy sector got a nice boost from President Trump’s blockade of sanctioned oil tankers in Venezuela.

The S&P Global US Services PMI slowed to 52.9 in December, the weakest expansion since June, as new business fell to a 20-month low and employment growth nearly stalled amid rising cost pressures. Manufacturing also softened, with the PMI slipping to 51.8 as production growth eased and new orders declined for the first time in a year, signaling a broader moderation in US business momentum.

CURRENCY FUTURES

US DOLLAR: The USD index is lower after November CPI inflation data surprised to the downside. The report offered some relief after months of sticky inflation, as it reinforced expectations that price pressures are cooling. However, the data does come with a grain of salt due to the government shutdown, which limited the BLS’s ability to collect October prices and assess month-over-month changes and also necessitated the BLS to implement a technical fix which could have biased the results downward. Despite signs of easing inflation, uncertainty remains over the Fed’s rate path, with policymakers divided after a third consecutive rate cut and Chair Powell warning the CPI figures may be distorted by the shutdown. Markets remain pricing in two rate cuts for 2026, while the Fed’s summary of economic projections was unchanged at just one. Powell suggested a rate hike is off the table and that it was not any policymakers’ base case.

EURO: The euro is stronger after weak US inflation data and as the European Central Bank left borrowing costs unchanged in a widely expected move and raised some growth projections as well. Inflation is still seen dipping below 2% next year and 2027, mostly on lower energy costs, but is then expected to come back to target in 2028, underpinning policymakers’ arguments that no policy change was needed now. Growth is expected to be slightly stronger this year than earlier predicted, as the bloc is proving more resilient than feared to global trade tensions and Chinese goods dumping. Growth in 2025 is expected to land at 1.4% (prev. 1.2%), 2026 GDP is now forecasted to grow 1.2% (1.0% prev.), while 2027 growth is expected at 1.4% (prev. 1.3%). Economic growth in the country continues to prove to be resilient, while inflation remains close to the bank’s 2% target. Revised CPI data for November for the eurozone out on Wednesday was revised slightly lower to 2.1% from 2.2%. Inflation in the eurozone is expected to stay in a tight range and not deviate much in 2026, while growth forecasts have been revised higher, a situation that offers policymakers at the ECB relief compared to their peers at the Fed. Recent surveys showed that companies grew more pessimistic about the first half of 2026 even as assessments of current conditions were unchanged, following weaker business activity across Germany and the eurozone. S&P Global PMI data showed manufacturing slipping into contraction, driven largely by Germany, while services activity softened but remained in expansion, supported by continued hiring and stable price pressures.

BRITISH POUND: The pound is stronger following soft US inflation data and as the Bank of England lowered its key interest rate to 3.75% in a widely expected move. The decision, however, brought a tight vote with a 5-4 split, with four of the committee’s members voting to keep rates steady at 4%, resulting in Governor Andrew Bailey casting the deciding vote. The pound strengthened following the decision, as markets likely took the tight split as a sign that future easing could face resistance as the economy still struggles with inflation, albeit an inflation picture that appears to be moderating. Inflation data out yesterday showed that price pressures eased to an annual rate of 3.2% in November, down from 3.6% in October and its lowest reading since March. Bailey said that rates appear to be on a gradual downward path, and the BoE expects inflation to fall “closer” to its 2% target in April, compared with November forecasts that expected inflation to reach 2% by mid-2027, as a reduction in energy bills and other policy measures from the government takes place. However, Bailey also noted “With every cut we make, how much further we go becomes a closer call.” Markets are still expecting one more cut by the bank in either April or June of 2026, with June’s cut being fully priced in, whereas a cut in April was previously fully priced in before the meeting, but if inflation continues to fall more rapidly, the bank could be prompted to lower rates further.

JAPANESE YEN: The yen is little changed following US inflation data ahead of the Bank of Japan’s policy meeting tomorrow, where markets have largely priced in a rate hike from the central bank, lending focus to any signals about future tightening of rates next year. It is likely that the BoJ will stress that the pace of further rate hikes depends on how the economy reacts to the initial increase in rates. The BoJ said that most of the companies it surveyed expected to raise rates at the same rate they did in 2025. This was a factor, which the bank had said was necessary in order for it to begin raising rates. Pressure on the yen also came from comments from Prime Minister Takaichi, who reiterated plans for proactive fiscal spending aimed at supporting growth and boosting tax revenues, raising fears of further strain on public finances. Japanese trade data out Tuesday evening rose well above expectations as exports rose 6.1% in November, surpassing forecasts of 4.8% and marking the strongest growth in nine months. Shipments to the US climbed 8.8%, the first increase in eight months, due to demand for pharmaceuticals, mineral fuels, and construction machines. Core machinery orders, a key leading indicator of capital expenditure over the next six to nine months, also jumped 7%, defying expectations of a 2.3% decline.

AUSTRALIAN DOLLAR: The Aussie is higher as US inflation data lifted market sentiment and as markets gradually expect a rate hike next year out of the central bank, with a move in February priced at 25%, 40% in March, and 70% in May. Minutes from the Reserve Bank of Australia’s December policy meeting are due next week and will provide some insight around the board’s deliberations about a possible future tightening and its concerns about inflation. In its mid-year fiscal update, the Australian government said its budget deficit for 2025/26 would now likely be slightly smaller than first projected at A$36.8 billion ($24.38 billion) thanks to fatter tax receipts. The small change should not require any increase in its planned A$150 billion of bond sales for the year to June 2026. Labor figures last week showed a surprise drop in employment, which led markets to slightly scale back bets on a rate hikes next year. Employment in Australia fell by 21,300 in November as full-time jobs more than reversed a large increase the previous month. However, the unemployment rate held steady at 4.3% despite markets forecasting a rise to 4.4% as fewer people went looking for work. However, the RBA still views the labor market as tight, citing high job vacancies, widespread staffing shortages, rising labor costs, and other indicators that the economy remains near full employment. The Reserve Bank of Australia kept rates on hold last week and signaled that the next move out of the central bank is likely to be upwards. Increased risks to inflation have presented themselves in the economy, requiring the RBA to need more time to assess the persistence of the inflationary pressures. Household spending, monthly inflation, and private demand figures have all posted strong readings recently and are likely to stay elevated. Data from the National Australia Bank also showed that capacity utilization across the economy was at its highest level in 18 months, which will add to the RBA’s level of concern about the inflation outlook.

INTEREST RATE MARKET FUTURES

Yields are lower across the curve in a steepening move as CPI data surprised to the downside, possibly opening the door for the Fed to operate with less caution in lowering rates in 2026. Headline CPI rose 0.2% between September and November, below expectations of a 0.3% rise and a relatively slower rise than earlier in the year, as the data reflects a two-month difference due to the lack of data collection in October as a result of the shutdown. Core inflation also rose at the same pace, reflecting a wave of disinflation over the period. Easing shelter (0.2% vs. 0.4%) and food (0.1% vs. 0.2%) prices helped bring the headline reading down despite a 1.1% rise in energy costs. However, the technical fix that was required to collect some of the data due to the shutdown may have biased the figures downward. Markets will have to wait for December’s reading to fully understand how price pressures have moved and could see an upward revision to the data.

The data comes after November’s jobs report showed payrolls increased by 64,000 in November, more than expected, while an abbreviated October estimate showed a decline of 105,000. October’s steep drop can be attributed to a large number of federal employees coming off payroll who had opted to take a deferred resignation, while data collection efforts were hampered by the government shutdown. October’s figure is likely to see continued revisions. The Labor Department revised down payrolls for both September and August, for a total gain of 82,000 jobs, instead of the 115,000 previously reported. Meanwhile, the healthcare sector continues to hold up the labor market as private nonfarm payrolls rose by 121,000 over October and November. During that time period, the healthcare and social-assistance sector gained 128,600 jobs.

For officials at the Fed, the uptick in the unemployment rate will be a talking point as it signals that the balance of labor demand and supply is changing. However, the jump in unemployment is not as big as it seems at first glance. The September figure was rounded down to 4.4%, and the November figure was rounded up to 4.6%, so the gap between them was closer to 0.12% rather than a full 0.2%. Still, November’s uptick in unemployment suggests that the level of hiring is below what is needed.

The spread between the two- and 10-year yields is at 66.80 bps, while the two-year yield, which reflects short-term interest rate expectations, fell to 3.450%.

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