Equity markets and bond prices fell hard after the release of the December jobs report, as the dollar and bond yields surged. However, market moves on January 10 were about more than the jobs report. Anticipation of this week’s forthcoming Consumer Price Index inflation report may also have been a key factor that moved markets. Base effects threaten to make year-on-year total and core consumer inflation rates accelerate in the December CPI report that will be released on January 15. Furthermore, if year-on-year total and core CPI inflation rates accelerate for December, financial markets could face significant turbulence as investors’ expectations for 2025 interest rate cuts fall further.
December Jobs Report Impacted Financial Markets Ahead Of Inflation Reports
Equity markets and bond prices fell hard after the December jobs report, as the dollar and bond yields surged. However, the market moves on January 10 were about more than the jobs report.
The strong December 2024 jobs report topped last week’s economic docket. However, other data were also positive—and stronger than expected.
The December ISM Non-Manufacturing Index accelerated to 54.1 from 52.1, reflecting ongoing growth in the services sector. Plus, weekly initial jobless claims fell to a very low 201,000, while the latest JOLTS report from the U.S. Bureau of Labor Statistics reflected an upside surprise, with almost 8.1 million open jobs in November. The only truly weak economic data last week was a decline in November factory orders by 0.4%. The week was otherwise filled with upside surprises for the economy.
As a result of last week’s solid growth data, the latest Atlanta Fed GDPNow shows Q4 2024 GDP likely to be 2.7%, based on data available through January 9, 2025.
Beyond positive growth data, the Federal Reserve released the minutes from the December 2024 meeting of the Federal Open Market Committee, which revealed their concerns about elevated inflation.
While the Fed minutes and solid growth data had already dampened expectations for future Fed rate cuts during the week, the December jobs report effectively drove the probability of a rate cut almost to zero since the unemployment rate fell to 4.1% and payrolls added 256,000 net new jobs in December with only a very modest net downward revision to the previous two payroll figures.
The release of solid jobs and growth data, coupled with policy concerns, moved markets in a big way. However, market mavens, traders, and institutional investors may have also started bracing themselves for December inflation data that will be released this week.
Waiting For This Week’s December Inflation Reports
The coming week’s economic docket includes a bevy of growth and inflation reports.
December economic growth reports that will be released this week are likely to be generally positive, including retail sales and industrial production. Jobless claims seem poised to rise modestly but remain relatively low, and the biggest downside seems to be that housing starts and building permits are likely to remain relatively weak and may exhibit mixed dynamics.
This week’s December inflation reports are likely to be more important for markets and Fed expectations than December growth reports. The December Consumer Price Index and Producer Price Index inflation reports are likely to show modest month-on-month pressures, with a risk of accelerating year-on-year CPI and core CPI rates.
November year-on-year consumer inflation rates are already elevated, with total CPI at 2.7%, core CPI at 3.3%, total Personal Consumption Expenditures inflation at 2.4%, and core PCE at 2.8%.
Despite already elevated inflation rates, Prestige Economics has cautioned that the December CPI report on January 15 could show accelerations in year-on-year total CPI to 3.0% from 2.7% and core CPI to 3.4% from 3.3%.
Prestige Economics has also warned that inflationary pressures would likely keep the Fed from cutting interest rates in January. Last week’s jobs data reinforced that outlook. However, a further acceleration in December year-on-year CPI inflation rates could also dampen expectations for future rate cuts beyond January—and throughout 2025.
Potential Consumer Inflation Impacts For Fed Policy
The December Federal Open Market Committee projections for the federal funds rate reflected expectations of only two 0.25% rate cuts by the end of 2025. While these forecasts were impacted by the acceleration in year-on-year consumer inflation reports through November, a further acceleration in year-on-year December CPI consumer inflation could push market expectations for future Fed rate cuts even lower.
On the upside, Prestige Economics expects any acceleration in the December year-on-year total or core CPI rate would likely be transitory, with lower year-on-year inflation rates in Q2 2025 due to base effects. In fact, total year-on-year CPI and PCE consumer inflation rates could still fall to the Fed’s 2% target in 2025, even though they are currently well above target. However, core inflation rates could remain above the Fed’s 2% for most or even all of 2025.
If year-on-year consumer inflation rates fall in the second quarter due to base effects, market participants may be underestimating the potential for two or more rate cuts in 2025.
The economic growth outlook is solid, and the Fed is unlikely to cut rates this month or in March 2025. However, a 0.25% rate cut in May 2025 still seems possible as year-on-year Total CPI consumer inflation likely falls due to base effects.
Future Inflation Report Implications And Risks For Financial Markets
Following the December Fed interest rate cut and FOMC projections, market expectations reflect an exceptionally low probability of an interest rate cut in January, with widely held expectations of fewer rate cuts in 2025 than the four indicated by the FOMC in September.
Of course, FOMC projections often differ greatly from reality—and there could be cause for the Fed to cut interest rates by more than 0.5% in 2025, especially if year-on-year consumer inflation rates fall significantly in Q2 2025. However, Q2 2025 is still several months’ worth of data in the future. In the immediate term, data in the forthcoming December 2024 consumer inflation report could make 2025 rate cut expectations fall from two 0.25% rate cuts to just one 0.25% rate cut—or even zero rate cuts.
If year-on-year total consumer inflation accelerates in the December CPI report, the dollar and bond yields could rise further in the week ahead, adding more downward pressure to equity prices, bond prices, and even industrial commodity prices.
What do you expect for the December CPI Report?
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