Bond Traders Reload Bets on Fed Cuts After CPI: Markets Wrap

It’s a “business-as-usual print” for the Fed, according to Bank of America Corp.’s Stephen Juneau, Meghan Swiber and Alex Cohen.

“Inflation is moving sideways on a y/y basis, but there is nothing in today’s report that would alarm the Fed,” they said. “Therefore, a 25 basis-point cut in December firmly remains our base case.”

To Preston Caldwell at Morningstar, while an an outside possibility of a “skip” still exists, he continues to believe the central bank will most likely cut rates next month.

After slashing rates last week, Fed Chair Jerome Powell worked hard not to offer forward guidance on where rates could go from here, keeping his options open for the December meeting and beyond. He stressed that officials can take their time to lower rates because the economy is strong. He also said that policy is still restrictive, even after the November cut, and that policymakers are in the process of bringing rates to neutral levels.

“Last week, Chair Powell reinforced that the Fed believes its policy stance is still restrictive, and that they remain on a rate-cutting trajectory,” said Lauren Goodwin at New York Life Investments. “We agree with current market expectations around Fed pricing.”

With inflation still stubbornly above the Fed’s 2% goal, the Fed may have only one rate cut left in December before taking a pause, according to Skyler Weinand at Regan Capital.

“The incredible move in the stock market post-election has effectively eased financial conditions,” he said. “This easing, combined with incoming fiscal stimulus, may warrant a pause on rate cuts by the Fed in the near future to allow the dust to settle and to process more incoming data.”

The Fed cutting short-term rates along with future fiscal stimulus may both ignite inflation again and provide cause for longer term interest rates to rise, he said, adding that he sees 10-year Treasury bond yields climbing to 5% in 2025.

In fact, a recent survey conducted by 22V Research shows the share of investors expecting a recession has fallen while the percentage of those that believe financial conditions need to tighten has increased to the highest since June 2024.

Ellen Zentner at Morgan Stanley Wealth Management remarks that markets are already weighing the possibility that the Fed will cut fewer times in 2025 than previously thought, and that they may hit the pause button as early as January.

“The sticky components of inflation continue to ease, giving the Fed some leeway to cut rates next month but they will most likely pause in January,” said Jeffrey Roach at LPL Financial. “The strength of some cohorts of the consumer is keeping upward pressure on prices as consumer spending hasn’t slowed yet. Stronger than expected economic growth is likely keeping bond yields elevated.”

Wall Street’s Reaction to CPI:

More of the Same. The October CPI release looks like it was cut from the same cloth as the last few reports – that is, flirting with the edge of acceptable levels of inflation driven by services prices.

Stickier services inflation right now is a nuisance for the Fed, like it’s stepped in gum along its rate cut path. The Fed wants to avoid the mistakes of the past by prematurely easing and risking a second wave of inflation, so we’d expect the FOMC to take this risk seriously. This doesn’t take a rate cut off the table for December, but it’s certainly not a slam dunk. Until then, the FOMC will receive one more CPI report before its December session, which should provide further clarity on the general direction of inflation.

Bang in-line core inflation leaves the Fed on track to cut rates in December. After a run of unseasonably hot autumn data, today’s number cools fears of an imminent slowdown in the pace of rate cuts. Still, with uncertainty over fiscal and trade policies high there is a risk that the Fed may opt to slow the pace of easing as the New Year chill sets in.

The CPI coming in as expected across all components triggered a sigh of relief from Treasuries.

Equity futures edged higher, but with the equity market extended following days of strong performance, the focus was on Treasury yields as concerns over still stubborn inflation has dominated headlines.

Still, the 2.6% year-over-year print, while expected, may keep the Fed mindful from declaring victory over its campaign to quell inflation.

After the massive rally we’ve seen in stocks, investors are looking for any sort of excuse that can usher in a pullback. Despite core CPI ticking higher for its third-straight month and headline CPI rising, a batch of in-line inflation data isn’t likely to do the trick.

Markets resolved higher following the election, instilling a “buy the dip” mentality on Wall Street. If the market were to sell off in the short term, the pullbacks are likely to be shallow as fund managers buy the dip and look to chase performance into year-end.

Current market odds are pricing in about a 60/40 chance of a 25 basis point rate cut in December. At the very least, this report likely won’t worsen those odds, and perhaps more likely, it could add to investors’ confidence that the Fed will again lower rates. However, a lot will hinge on the upcoming PCE report and non-farm payrolls report later this month and in early December, respectively.

Remember, the Fed is unlikely to be swayed by one data point. Instead, the committee will weigh multiple reports and data points when deciding on its next interest rate decision. If PCE comes in higher than expected and the jobs report is strong, then we could see expectations for a rate cut fall.

It’s time to stop worrying about the Fed and inflation. Stocks have been on autopilot since the election and today’s numbers do nothing to hurt the trend. December is still in play for a cut.

There were no upside or downside surprises in the October CPI data, which is on balance encouraging because that means inflation continues to normalize.

Corporate Highlights:

• Advanced Micro Devices Inc. is shedding about a thousand jobs as part of an effort to refocus on newer markets like artificial intelligence chips.

• Cava Group Inc. raised its full-year outlook for a third straight quarter and posted quarterly sales that beat market expectations, the latest example of a fast-casual company winning over diners while the rest of the industry struggles.

• Spirit Airlines Inc. is closing in on a deal with creditors that would restructure its crushing debt load in bankruptcy court after discussions for a tie-up with rival Frontier Group Holdings Inc. fell apart.

• Mastercard Inc. projected slower annual net revenue growth for the 2025 to 2027 period, it said Wednesday ahead of its investor day.

• Spotify Technology SA reported third-quarter growth in subscribers and profit margins, saying lower marketing and personnel costs helped overcome a tough climate for advertising.

• Instacart posted strong revenue in the third quarter, a sign of resilience in its core grocery delivery business. However, it forecast adjusted earnings in the current period that fell short of analysts’ expectations.

• Charter Communications Inc. agreed to buy Liberty Broadband Corp. in an all-stock transaction.

• Volkswagen AG raised investment plans in Rivian Automotive Inc. by $800 million, signaling its commitment to the US partner even as electric-vehicle demand softens and the incoming Trump administration threatens to curtail supportive policies.

• Wonder Group Inc. is buying Grubhub from Just Eat Takeaway.com NV for about $650 million, acquiring the restaurant delivery service at a steep discount to the $7.3 billion price tag it commanded during the early days of the Covid pandemic.

Key events this week:

• Eurozone GDP, Thursday

• US PPI, jobless claims, Thursday

• Fed speakers include Jerome Powell, John Williams and Adriana Kugler, Thursday

• China retail sales, industrial production, Friday

• US retail sales, Empire manufacturing, industrial production, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 rose 0.3% as of 12:07 p.m. New York time

• The Nasdaq 100 was little changed

• The Dow Jones Industrial Average rose 0.4%

• The Stoxx Europe 600 fell 0.1%

• The MSCI World Index was little changed

Currencies

• The Bloomberg Dollar Spot Index rose 0.3%

• The euro fell 0.5% to $1.0568

• The British pound fell 0.3% to $1.2709

• The Japanese yen fell 0.5% to 155.38 per dollar

Cryptocurrencies

• Bitcoin rose 5.2% to $92,887.04

• Ether rose 0.7% to $3,302.4

Bonds

• The yield on 10-year Treasuries was little changed at 4.42%

• Germany’s 10-year yield advanced three basis points to 2.39%

• Britain’s 10-year yield advanced two basis points to 4.52%

Commodities

• West Texas Intermediate crude rose 0.3% to $68.34 a barrel

• Spot gold fell 0.5% to $2,585.25 an ounce

This story was produced with the assistance of Bloomberg Automation.

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