The FX market was showing modest changes coming into the US session as the market braced for the CPI data. Yesterday, the PPI came in weaker than expected.

The Consumer Price Index (CPI), while coming in close to expectations, gave traders confidence that the combination of the PPI and CPI would lead to a tame—or at least manageable—Personal Consumption Expenditures (PCE) price index later this month.

For December, the CPI rose 0.4% month-over-month, the largest increase in nine months, driven largely by a 2.6% surge in energy costs. This pushed the year-over-year headline inflation rate to 2.9%, up from 2.7% in November, marking the highest level since July.

Despite the increase in headline inflation, underlying price pressures moderated. The core CPI, which excludes volatile food and energy prices, rose by 0.2%, slightly below economists' expectations of 0.3%. This deceleration brought the annual core inflation rate down to 3.2% from 3.3% in November, signaling easing inflationary pressures. Analysts project the core PCE index—the Fed's preferred inflation gauge—to rise between 0.16% and 0.19%. A figure below 0.2% would be seen as positive for markets, reinforcing expectations of at least two rate cuts in 2025, even after the 100 basis points of cuts already delivered since September.

The markets, which had been concerned about the possibility of zero cuts, responded positively to the CPI data. U.S. stock markets surged, posting their strongest gains since the November 6 post-election rally.

  • The S&P 500 gained 1.65%.
  • The Dow Jones Industrial Average rose 1.83%.
  • The Nasdaq Composite climbed 2.45%.
  • The Russell 2000 increased by 1.99%, marking its best performance since November 6.

This rally reflects renewed market optimism as inflation data continues to support a narrative of easing pressures, paving the way for potential rate cuts ahead.

In addition to the CPI data, the Federal Reserve officials provided insights into the economic outlook and monetary policy today:

Richmond Fed President Thomas Barkin expressed optimism about inflation easing toward the 2% target. He noted that price-setting behavior is returning to pre-pandemic patterns, while demand remains solid but not overheated. Barkin emphasized that the job market has stabilized, and the economy shows no signs of significant weakening. He also indicated that long-term interest rates are not restrictive and have not influenced policy adjustments, though uncertainty around incoming fiscal policies adds complexity to the outlook.

New York Fed President John Williams underscored the data-dependent nature of monetary policy amid a highly uncertain environment. He projected moderate growth of 2% and stable unemployment around 4%–4.25%. Williams anticipates continued, albeit uneven, progress toward the 2% inflation target, supported by easing housing-related pressures and a rebalancing of supply and demand. While bond yields have risen, Williams attributed this to term premia rather than inflation expectations, affirming that monetary policy is well-positioned for the current economic climate.

Chicago Fed President Austan Goolsbee shared a cautiously optimistic view, highlighting recent inflation data as reflective of progress toward the 2% target over the past six months. He remains hopeful for a "soft landing" in 2025 but acknowledged lingering uncertainties, particularly regarding fiscal policies that could affect inflation. Goolsbee stressed the importance of assessing the overall impact of government policies, reiterating the Fed's commitment to achieving its inflation goals.

Later in the day, the Fed's Beige Book of anecdotal information on the economy, and said that economic activity in late November and December increased slightly to moderately across the twelve Federal Reserve Districts, buoyed by strong consumer spending during the holiday season and modest growth in vehicle sales. However, construction activity declined due to high costs of materials and financing, while manufacturing also saw a slight decrease, with some producers stockpiling inventories ahead of potential tariff hikes. Residential real estate activity was flat, constrained by elevated mortgage rates, though commercial real estate saw a slight uptick. The nonfinancial services sector experienced slight growth, particularly in leisure, hospitality, and transportation, despite a decline in truck freight volumes. Financial services noted modest growth in lending but raised concerns over delinquencies among small businesses and lower-income households. Meanwhile, agriculture faced weak conditions, with lower farm incomes and challenges from weather and avian flu, which drove up egg prices. Energy activity presented a mixed picture, with optimism for 2025 tempered by uncertainties around immigration and tariff policies.

Labor markets showed slight employment gains, particularly in service industries like healthcare and construction, while manufacturing employment remained flat. Employers continued to report difficulty finding skilled workers, although layoffs were rare. Wage growth picked up to a moderate pace, though there were signs of easing wage pressures, reflecting some uncertainty about future staffing needs.

Prices rose modestly overall, with input costs increasing in areas such as health insurance, though some sectors, including retail and manufacturing, reported flat or declining prices. Fuel costs also stabilized in some regions. Price growth is anticipated to persist in 2025, with tariff-related increases remaining a concern for many sectors.

Some market levels near the end of day are showing:

  • S&P +1.83%
  • Nasdaq +2.45%
  • Rusell 2000 +1.99%
  • 2 year 4.265%, -9.9 bps
  • 10 year 4.655%, -13.3 bps
  • Crude oil +$2.85 at $80.35
  • Gold rose $17.58 ro 0.69% at $2694.0
  • Bitcoin moved back above $100K but is trading just below at $99,686

In the forex, the USD is mixed after earlier declines were reversed.

The USD is ending marginally higher vs the

  • EUR (+0.18%), CHF (+0.09%),

HOwever it is lower vs the

  • JPY (-0.91%),
  • GBP (-0.15%),
  • CAD (-0.08%)
  • AUD (-0.50%) and the
  • NZD (-0.18%).