The market is acting as if core CPI at 4.0% instead of the 4.1% reading expected is a gamechanger.
US 5 year yields are back to where they were in August... back before the Fed started talking about higher yields doing their work for them.
That could worry the Fed, especially if tomorrow's retail sales data shows sign of a consumer pickup. There other signs of a strong consumer as well, with this survey showing a record number of Americans planning to go on vacation to a foreign country in the year ahead.
When you look at the Fed stance, it's not just about tagging 2% inflation because of disinflation in shelter or energy costs, they want to get to sustainable 2% inflation. Over and over, they have repeatedly emphasized that it will take a weaker economy to make that happen. Could they back down to markets? They certainly could but the timeline that markets are putting on hikes right now is aggressive.
After today's data:
- No chance of a hike in December, from a 7% chance previously
- A slight chance of a cut in January, from a 33% chance of a hike previously
- A 91% chance of a cut priced in for the May 1 meeting
- 102 bps in cuts priced in for next year
