The U.S. November Consumer Price Index (CPI) release met market expectations and reinforced anticipation for another Federal Reserve (Fed) rate cut this month. Following the data release, the S&P 500 index halted a two-day decline, while the Nasdaq index, buoyed by tech stocks, surpassed the 20,000-point mark for the first time. Meanwhile, the 10-year Treasury yield resumed its upward trajectory.
Data published by the U.S. Bureau of Labor Statistics on December 11 showed that the November CPI increased by 2.7% year-over-year (previous 2.6%), marking the second consecutive month of acceleration. The month-over-month increase was 0.3% (previous 0.2%). Core CPI maintained its year-over-year growth at 3.3% (unchanged from previous), with a month-over-month increase of 0.3% (also unchanged).
Breakdown the components, the CPI rise primarily reflects a narrowing decline in energy prices, with the year-over-year decrease moderating to 3.2% (previous -4.8%). Core goods prices exhibited a similar trend, with the year-over-year decrease narrowing to 0.7% (previous -1.2%), indicating accelerated annual growth in new and used vehicle prices.
Core services prices continued their downward trend, with the year-over-year increase declining to 4.6% (previous 4.8%). Within this category, housing services prices, which constitute the largest component, continued to be influenced by new lease rent. Both residential rent and owners' equivalent rent saw annual increases fall to 4.4% (previous 4.6%) and 4.9% (previous 5.2%), respectively. However, the overall level remains elevated, presenting the main obstacle to further inflation reduction.
(November CPI Component MoM, Source: BLS)
Overall, this uptick primarily reflects the continuing narrowing of price declines in energy and core goods, while a weakening base effect simultaneously drove up the year-over-year inflation rate. The overall increase aligned with market expectations.
The market has further increased its anticipation of a Fed rate cut in December, with the FedWatch tool indicating a 98% probability of a 25 basis point cut. The certainty of a rate cut, coupled with strong performance in tech stocks, ended the S&P 500's two-day decline and propelled the Nasdaq index above 20,000 points for the first time.
However, considering that the downward momentum in core goods prices may not be as strong next year as it was this year, and that service price declines are expected to remain slow, combined with November employment data showing a continued slowdown in the labor market without significant deterioration, these factors align with the Fed's scenario for gradual interest rate reduction.
Consequently, the market widely anticipates that the Fed will narrow its Summary of Economic Projections (SEP) interest rate dot plot to around 50-75 basis points (compared to 100 basis points in the September SEP) at its December meeting. Reflecting these expectations, the 10-year Treasury yield rose again by approximately 4.5 basis points to around 4.27%.
(Fed Rate Cut Expectation in 2025, Source: FedWatch)