- Economists expect US inflation to increase by 0.2%.
- Prices have dropped sharply this week as markets adjusted to a less dovish Fed outlook.
- US retail sales jumped by 0.7% in November.
Interest futures paused their decline on Friday as market participants awaited crucial US inflation figures for more clues on Fed policy. However, prices wallowed near weekly lows after a week of upbeat US economic data and a sharp drop in Fed rate cut expectations.
The US will release its core PCE price index report on Friday, showing the state of underlying price pressure. This report will continue to shape the outlook for rate cuts in the US. Notably, economists expect inflation to increase by 0.2% compared to the previous increase of 0.3%. A bigger-than-expected increase will reduce Fed rate cut expectations, boosting Treasury yields and weighing on interest futures. On the other hand, if inflation is softer than expected, it might briefly support interest futures.
Prices have dropped sharply this week as markets adjusted to a less dovish Fed outlook. A series of upbeat economic figures at the start of the week showed continued resilience, which has increased caution among policymakers. PMI figures revealed a decline in manufacturing activity. However, an unexpected jump in business activity levels in the services sector overshadowed the decline.
Meanwhile, US retail sales jumped by 0.7% in November, beating estimates of a 0.6% increase. The increase in sales was a clear indicator of solid consumer spending. A robust economy results in higher inflation. Therefore, Fed officials turned from their dovish stance after the first rate cut as data consistently surprised to the upside.
Dollar and yields (Source: Bloomberg)
As a result, at the Fed meeting on Wednesday, the central bank projected only 50-bps of rate cuts in 2025. Therefore, the rate cut had little impact on prices. Meanwhile, the new forecast boosted the dollar and Treasury yields while interest futures suffered.
It has been a mixed year of strength ahead of the first Fed meeting and weakness as the outlook for rate cuts slowly shifted. Additionally, Trump’s win in November increased the likelihood of a spike in inflation that will further challenge the Fed’s easing cycle. If Trump passes his policies on tax cuts and tariffs, the US economy will likely reheat, and consumer prices will surge. Therefore, as Treasury yields will likely rally, 2025 might be a difficult year for interest futures.
