Inflation Rises More Than Expected To 3.4% In December, Rattling Traders Betting On Fed Rate Cuts

Inflation accelerated again in December, surpassing analyst expectations and challenging market expectations for interest rate cuts by the Federal Reserve in early 2024.

According to the latest report from the Bureau of Labor Statistics, the Consumer Price Index (CPI) increased to 3.4% in comparison to December 2022, up from November’s 3.1% and exceeding the anticipated 3.2%.

Before the report was released, traders had priced in a 70% probability of a Fed interest rate cut as soon as March, along with a total of six rate cuts by the end of the year. This hotter-than-expected inflation report could lead to a reassessment of those expectations.

Key Highlights From The December Inflation Report:

• The annual CPI inflation rate rose to 3.4% in December 2023, up from the previous 3.1% and exceeding the expected 3.2%.
• On a monthly basis, the CPI increased by 0.3%, surpassing the expected 0.2% and accelerating from November’s 0.1%.
• The annual core CPI inflation rate slightly decreased to 3.9%, down from November’s 4% but still above the expected 3.8%.
• On a monthly basis, the core CPI increased by 0.3%, in line with November’s figures and economist predictions.
• In December, the shelter index continued its upward trajectory, showing a 0.6% month-on-month increase, which accounted for more than half of the overall monthly price rise. Looking at the yearly basis, the shelter item registered a 6.2% increase.
• The energy index saw a 0.4% increase, marking its first monthly uptick since September. This was driven by higher electricity and gasoline prices, which more than compensated for the decline in the natural gas index.
• The food index recorded a 0.2% increase in December, mirroring the same increase observed in November.

Market Reactions

In the minutes following the inflation announcement, the U.S. dollar index (DXY) experienced a notable increase, driven by the rise in Treasury yields, reflecting a readjustment of Federal Reserve rate wagers.

The yields on U.S. two-year Treasury bonds saw an uptick, increasing by 3 basis points to 4.36%, while the 10-year yield surged past the 4% mark once again.

Ahead of Wall Street opening bells, futures on the S&P 500 were trading 0.2% lower. On Wednesday, the S&P 500, as represented by the SPDR S&P 500 ETF Trust SPY, closed 0.6% higher, reaching levels last observed in late December 2023.

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