- The US Consumer Price Index showed cooler-than-expected underlying inflation in December.
- US retail sales increased missed forecasts.
- Market participants await Donald Trump’s inauguration next week.
Interest futures rose for the third session this week as the dollar and Treasury yields eased after downbeat economic figures. However, as market participants await Donald Trump’s inauguration, things might change.
Last week, interest futures ended down after US jobs data lowered Fed rate cut expectations, leading to a rally in Treasury yields. Notably, the US economy added 256,000 jobs in December, surpassing the forecast of 164,000. At the same time, the unemployment rate eased from 4.2% to 4.1%, indicating increased demand for labor. The upbeat figures pushed investors to slash 2025 rate cut expectations from 50-bps to 27-bps. Consequently, Treasury yields soared, putting downward pressure on interest futures.
However, the trend changed this weak as the US released softer-than-expected economic figures. The week started with downbeat wholesale inflation numbers. However, investors were more focused on the Consumer Price Index, which showed cooler-than-expected underlying inflation in December. According to the report, the monthly figure increased by 0.4% and the annual figure by 2.9%. These numbers came in line with expectations.
Meanwhile, core inflation increased by 0.2%, missing forecasts of a 0.4% increase. The report pushed up Fed rate cut expectations, pausing the rally in the dollar and Treasury yields. Meanwhile, interest futures jumped.
US retail sales (Source: Commerce Department)
Furthermore, data on Thursday revealed that US retail sales increased by 0.4% in December, missing estimates of 0.6%. Although it was a strong month, the soft numbers boosted Fed rate cut expectations.
Nevertheless, it is still too early to predict what the Fed will do this year. The US will release more data, which might completely shift the outlook on monetary policy. At the same time, market participants remain uncertain about Trump’s plans once he takes office next week.
Analysts have noted severally that Trump’s administration will be good for the economy. He plans to cut taxes and impose tariffs on imported goods, among other policy changes. If he does this, the local business environment will improve, and demand for US goods will increase, boosting the economy. However, inflation will also increase, forcing the Fed to pause its rate cuts. On the other hand, if Trump is not as aggressive as expected, the US Central Bank might have enough room to lower borrowing costs.