From a UBS note on thier outlook for the Federal Open Market Committee (FOMC). UBS notes that last week's hotter-than-expected US inflation print has markets rethinking Fed rate cut bets:
- Core CPI came in at 0.3% m/m for the second straight month, topping estimates and pushing the y/y rate to 3.3%.
- The data, coupled with recent strong jobs numbers, has traders slashing odds of aggressive easing. CME FedWatch now shows zero chance of a 50bp cut, down from 35% last week. Odds of no cut have jumped to 15% from zilch.
But, say the analysts, don't throw in the towel on 2024 cuts just yet.
- Overall inflation trends remain downward despite monthly noise. Headline CPI eased to 2.4%, lowest since 2021. Shelter costs moderated significantly. And remember, August CPI also disappointed before PCE came in softer.
On the Federal Reserve UBS says that officials aren't sweating individual prints either:
- NY Fed's Williams noted the steady downtrend in inflation.
- Chicago's Goolsbee and Richmond's Barkin echoed similar sentiments.
- FOMC minutes show policymakers eyeing a move toward neutral over time, assuming data cooperates. They see current policy as restrictive and acknowledge the need to normalize eventually.
The 'bottom line' is that while rate cut timing may shift, the easing bias remains intact.
What to watch - markets will be on high alert for upcoming PCE data to confirm or challenge the CPI surprise.
(As a heads up, the next Personal Consumption Expenditures (PCE) report, which includes data for September 2024, is scheduled for release on October 31, 2024. )
