Excluding food and energy, the core consumer price index (CPI) rose 0.2% in October from the previous month, below market expectations and previous estimates of 0.3%.

【Bloomberg News, 11/15】

1. U.S. Source Inflation Slows

Excluding food and energy, the core consumer price index (CPI) rose 0.2% in October from the previous month, below market expectations and previous estimates of 0.3%. Year-over-year, it was 4.0%, slowing from the previous 4.1%. Headline CPI growth was 0.0% month-on-month and 3.2% year-on-year. Excluding housing costs and energy, the rate of increase in service prices has also retreated to its lowest level in almost two years, and so-called core goods prices have fallen for five consecutive months. Despite some surprises in recent months, several Fed members cautiously suggest a mission accomplished as inflation has stabilized considerably from a 40-year high recorded last year. However, Fed Chairman Jerome Powell has repeatedly emphasized the hawkish stance, saying that he can raise interest rates again if necessary. Bloomberg Economics diagnosed that the lower-than-expected core inflation will strengthen the Fed’s confidence that policy rates are sufficiently constrained. Although the FOMC will declare a definite end to the rate cut cycle only if the trend continues for several more months, it is pointed out that the urgency for the Fed to take action immediately has disappeared as deflationary momentum recovers and oil prices also weaken in November.

2. YEONJUN’s mission accomplished?

“I think the Fed has accomplished its mission,” said Tony Farren of Michler Financial Group on a softer-than-expected CPI indicator, adding, “It’s clear that the peak of inflation has passed. “Unless oil prices exceed $100 a barrel and stay there for a while, bond rates have also passed their highs,” he claimed. Erin Browne, multi-asset strategic portfolio manager at Pimco, said, “It will take time for inflation to come down, so the Fed could remain frozen for longer than usual,” predicting that the Fed is expected to watch the trend more than confident of winning on a single indicator. Nevertheless, Pimco put forward again the prospect of a strong bond, seeing the probability of a U.S. economic slowdown next year as around 50%. Jay Bryson, chief economist at Wells Fargo, diagnosed, “At this point, the bar for further interest rate hikes is increasingly high.” Bryce Dotty of Sit Fixed Income Advisors said even the last investors who were not sure that the Fed’s tightening was over now seem to have “given up,” and predicted that “the Fed’s next move is likely to be a cut next summer rather than an additional increase.” New York Life Investments warned that financial conditions are easing again, wary of excessive excitement from investors, and that the Fed may not let go of its tension.

3. Still cautious YEONJUN

Richmond Fed President Thomas Barkin said he was still unsure whether inflation was moving firmly toward the central bank’s 2% target, despite “substantial progress” in efforts to curb inflationary pressure in recent months. “I’m not sure inflation is on a smooth landing path up to 2%,” he said in remarks at the South Carolina event after the U.S. Consumer Price Index (CPI) release on Tuesday local time, explaining that “inflation numbers have fallen, but mostly because of a partial return to COVID-era price surge caused by rising demand and supply shortages.” Above all, it is pointed out that housing costs and service inflation are still high compared to historical levels. Although the Fed’s policy is going in the right direction, recent indicators say the U.S. economy is surprisingly resilient.
He reiterated that he was comfortable in supporting the rate freeze at the last FOMC meeting because interest rates were limited and financial conditions were tight. Companies say they won’t want to cut prices until the moment they need to, and that growth may have to slow down. Under these circumstances, he added, “I am expecting some slowdown.” Chicago Fed President Ostan Goolsbee also welcomed slowing inflation but said, “We still have a way to go.” “Good inflation is already coming down and non-housing service inflation is usually slow to adapt. Housing costs are key to further progress over the next few quarters, and “more generally, there are always some obstacles when inflation falls.”

4. Citadel Griffin ‘Hurt Fed confidence if interest rates fall too fast’

Ken Griffin, founder of big hedge fund Citadel, warned that the Fed’s hasty return to cutting interest rates risks hurting the reputation of the central bank. In an interview with Bloomberg in Miami on Tuesday, local time, he said, “The Fed needs a message that it plans to put the inflation fairy back into the bottle,” adding, “If interest rates are cut too quickly, the Fed’s willingness to target 2% inflation risks losing trust.” It also pointed to recent volatility in the U.S. bond market, saying it was surprised by the market reaction on Tuesday, but diagnosed that the 10-year U.S. bond rate of 4.5% seems reasonable. Above all, it is predicted that fiscal policy will not be tightened much due to political pressure following next year’s U.S. presidential election. The U.S. economy is expected to remain sluggish in the second quarter of next year, but its intensity depends on a number of factors. It also added that it does not anticipate further interest rate hikes or a reduction in the fiscal deficit by the Fed. Meanwhile, he said he would soon decide whether to financially support Republican presidential candidate Nikki Haley.

5. 中 Housing Market Relief Measures

The People’s Bank of China (PBOC) plans to provide at least 1 trillion yuan ($137 billion) worth of low-cost financing to urban regeneration and affordable housing supply programs to revive the slumping real estate market, sources said. After the report, the dollar-in-the-counter yuan exchange rate fell by 0.6% at one point. According to sources, PBOC intends to inject funds step by step through policy banks to ultimately flow into household housing purchases. In addition, officials are considering several options, including collateral complementary loans (PSL) and special loans, and may take the first step as early as this month. The size of the new funds has yet to be finalized. PBOC did not immediately respond to a request for comment. The balance of loans through PSL, so-called “helicopter money,” was 2.9 trillion yuan as of October, and if a net investment of 1 trillion yuan this time will exceed the record high set in 2019. The plan is part of a new initiative led by Deputy Prime Minister Huifeng, which suggests that Chinese authorities are ramping up their efforts to somehow end the worst deterioration in the real estate economy in decades, weighing on economic growth and consumer sentiment.