Electrifying Market Response to U.S. December CPI Data
January 15, 2025
At first glance, today’s huge sigh of relief by investors appears overly optimistic. They previously were fearful that disinflation may have run out of steam, or worse, given way to a fresh upward cycle. The total consumer price index increased 0.4% on month, propelled by a 2.6% leap in the energy component. Year-on-year inflation, a 5-month high of 2.9%, accelerated for a third straight month and was a half percentage point above September’s 43-month low of 2.4%. Core CPI was tamer than anticipated but not unduly so. The 0.2% monthly rise in core was the smallest in five months, and the 12-month rate of increase only dipped 0.1 percentage point to 3.2%.
By midday in the NY trading day, nevertheless, the ten-year Treasury yield had dived 13 basis points, dragging similar sovereign debt yields down by 16 basis points in Great Britain, 14 basis points in Italy, 12 bps in France and Spain, and 9 bps in Germany.
The S&P 500 and Dow were up 1.5%, and the Nasdaq had recovered 2.0%. Gains between 1% and 2% had occurred in Germany, Italy, Spain and the U.K. as well. Earlier today and well before U.S. CPI figures were reported, equities had closed down 1.2% in Taiwan, 0.9% in Malaysia, and 0.4% in China and Singapore.
The fading perceived chance of a Fed interest rate hike this year sent the dollar down 0.9% against the yen, 0.5% relative to the Australian dollar, 0.3% versus the peso and 0.1% against the Canadian dollar and sterling. But gold and Bitcoin prices had jumped 1.0% and 2.8%.
Yesterday’s U.S. producer price report had also been a tad lower than forecast, but monetary officials aren’t going to react to a single month’s number. At minimum, let’s see what the PCE price deflator, due later this month, shows. That’s the price indicator that Fed officials actually target.
The CPI news arrive less than a week from the Trump inaugural, which figures to bring substantial policy changes, many of which have inflationary implications such as higher import tariffs and a tax cut that will lift the federal deficit. Energy prices have made an upward move, and catastrophic fires in California and other weather disasters around the U.S. will add new impetus to insurance costs that already have been rising sharply.
The U.S. CPI release was but one of many inflation reports around the world today.
- In Africa’s most populated country, Nigerian CPI inflation printed at a 345-month high of 34.8% in December, more than double the November 2021 pace of 15.8%.
- Bulgarian CPI inflation ticked up 0.1 percentage point to a 5-month high of 2.2%.
- After surging to 18.7% in September 2022 soon after the outbreak of war in Ukraine, Russian CPI inflation had receded to 2.3% by April 2023, but a fresh uptrend has lifted such back to a 22-month high of 9.5%.
- Slovakian CPI inflation of 2.9% in December was lower than in the prior month but above the three-year low of 2.1% set last April.
- French CPI inflation last month was aligned with the preliminary estimate of 1.3% and November’s pace but above this year’s low of 1.1% in September.
- Spain’s 2.8% on-year CPI inflation rate in December was 0.4 percentage points higher than in November, which had matched a 42-month low set in September.
- Polish CPI inflation of 4.7% at the end of 2024 was the same as November’s pace but more than twice the year’s low of 2.0% in March.
- Austrian CPI inflation rose to a 4-month high of 2.0% in December from 1.9% in November and 1.8% in October.
- Israeli CPI inflation had receded back to 3.2% last month from August’s high of 3.6%.
- British consumer price inflation edged 0.1 percentage point lower in December to a 2-month low of 2.5%, and core CPI of 3.2% was at a 3-month low. But producer output inflation (+0.1%) followed three straight sub-zero readings, and producer input inflation was less negative in December than November.
- German wholesale price inflation of 0.1% last month ended a streak of 19 consecutive sub-zero readings.
Two central banks made interest rate decisions today. Bank Indonesia’s key rate was unexpectedly cut by 25 basis points to a 15-month low of 5.75%. An initial 25-bp reduction in September had ended a 17-month period when the rate peaked at 6.25%. A stable rupiah and in-target inflation of 1.6% led officials to implement a second rate cut to lend support to growth.
At the National Bank of Romania, officials had already cut their interest rate twice during the third quarter. The current rate is 6.5% versus a peak of 7.0% maintained from January 2023 until July of last year. Like many European currencies, the Romanian Leu has depreciated against the dollar. With energy prices now accelerating, there is additional incentive for officials to approach interest rate cutting with great caution. So once again they decided not to lower their policy interest rate further at this time.
Industrial production in the euro area rose on month by 0.2% in November, matching October’s increase. Over the three months through November, production nonetheless fell 0.4% relative to the average level in June-August and was 1.5% below its level a year earlier.
German real GDP contracted 0.2% on average in 2024, following a 0.3% drop in 2023. That completes a five year period since the onset of Covid when GDP only grew a total of 0.3%, and the growth rate in the two prior years of 2018 and 2019 had been just 1.6% and then 1.0%. Germany has seemingly lost its post-WW2 mojo, and with globalization out of favor in the world, near-term prospects for Europe’s main economy do not look promising. Voters elect a new parliament next month and will have a chance to express their frustration.
Copyright 2025, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Bank Indonesia, British CPI, German GDP, National Bank of Romania, U.S. CPI
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