Weekly Investment View: Will Strong CPI Vindicate the Fed’s Pause?

This Week

• US Macro – Dominique notes potential for strong CPI this week and argues December core PCE over 0.2% MoM would vindicate the Fed’s decision to stay on hold until disinflation resumes.
• US Rates – Antonio expects sticky inflation ahead and argues rising long-end yields and tightening financial conditions should be a headwind for US growth (vs consensus) by Q1.
• EM Macro – Caroline expects a third consecutive BOK rate cut this week, with potential for a deeper cutting cycle this year than the market is pricing.
• EZ and UK Macro – Henry previews UK inflation and French PM Bayrou’s policy speech. He sees a French election in H2 as likely and remains short 10Y OAT vs Bund.
• $-Bloc and Scandies – Ben remains short AUD/NZD despite a strong Australia Melbourne Institute inflation outturn.

Current Trades

DM

Rates

1. Long SOFR Z5 (first 50% of position entry: 96.06, target: 96.6, stop: 95.75; remaining 50% of position entry: 95.94) – read here.
2. 2s10s Gilt steepener (entry: 0.00%, target: 0.60%, stop: -0.30%) – read here.
3. Long SONIA Z5 (entry: 95.90, target: 96.40, stop: 95.70) – read here.
4. 10Y OAT/Bund widener (entry: 0.700%, target: 1.000%, stop: 0.500% – read here.
5. Pay 10Y EUR swap (entry: 2.430%, target: 3.000%, stop: 2.050%) – read here.

FX

1. Short AUD/NZD (entry: 1.109, target: 1.06, stop: 1.13) – read here.

EM

FX

1. Long 3m USD/CNH (entry: 7.21, target: 7.44, stop: 7.09) – read here.
2. Long PLN/CZK (entry: 5.87, target: 6.05, stop: 5.79) – read here.
3. Short INR/KRW (entry: 17.0, target: 16.5, stop: 17.2) – read here.

Dominique Dwor-Frecaut – US Macro

The key data this week is CPI. The market consensus now agrees with Sam’s model prediction (which was on the hawkish side when released), looking for +0.4% MoM headline and +0.3% MoM core.

Such figures would align with my expectation of sticky inflation in 2025. The combination of PPI and CPI will provide an estimate of core PCE, the main price index targeted by the Fed. Despite November core PCE falling to 0.11% MoM, the three-month average has been 0.21%. December core PCE above 0.2% MoM would vindicate the Fed’s decision to wait for an actual resumption of disinflation before proceeding with further rate cuts.

Antonio Del Favero – US Rates

The consensus CPI expectations outlined above align with the sticky inflation path I expect: core CPI to remain above 3% YoY for now. Worries about inflation, larger fiscal deficits, a more hawkish Fed, ongoing QT and a remarkably strong US economy (on the back of very easy FCs) have pushed long-end yields higher. Meanwhile, USD has been rising significantly.

Now the key question is, are FCs tightening enough to slow the economy below potential, and more importantly below what consensus expects? I see a good chance of this by Q1 (Chart 2). This is also because immigration has slowed and should keep slowing.

I am long SOFR Dec 2025. I was perhaps slightly too early on that, particularly given tomorrow’s CPI. Not imminently, but we could well see weaker-than-expected economic data by Q1.

Caroline Grady – Emerging Markets

A third consecutive rate cut in Korea. Below-target inflation and an increasingly weak growth outlook should be sufficient for a third consecutive rate cut later this week. Consumer confidence has slumped to its lowest level since mid-2020, and exports are sluggish despite frontloading ahead of higher tariffs.

But the BOK is balancing financial stability concerns given sharp KRW weakness and still-high household debt. Stabilization measures from the BOK/MinFin failed to stem the won’s slide in December. But dollar sales by NBP – part of a strategic hedging plan – should prove more powerful. While NPS plans are not public, the BOK said in December that NPS hedging was expected soon. And the currency has traded weaker than the discussed 1450 level on USD/KRW needed to activate hedging since the start of the year.

Only 40bps priced in rate cuts. Easing cycles tend to be shallow in Korea with 50-75bps in annual cuts the norm outside of the GFC. BOK already cut by 50bps late last year, taking the policy rate to 3.0%. Only around 40bps is priced for this year. Yet given the extent of the slowdown and contained inflation, we expect this year could be an outlier with a deeper cutting cycle.

Henry Occleston – Eurozone & UK Macro

At UK December CPI (Wednesday) we expect a beat in headline at +2.7% YoY (consensus: +2.6%, BoE: +2.5%), agree with consensus on core at +3.4% (BoE: +3.3%) and expect a stronger beat in services at +5.1% (consensus +4.8%, BoE: +4.7%). Such an outcome would likely increase UK rates bearishness but not really affect BoE policy (we expect the core goods and wage-intensive services inflation will remain suppressed ahead, Chart 5).

We still like buying dips in SFIZ5 and remain long, but we no longer like the UK long-end, instead preferring gilt steepeners.

Final December EZ CPI (Friday) is expected to be confirmed at 2.4% YoY headline and 2.7% core. We look for further confirmation that 2023 seasonalities in core and services persisted into the December 2024 data (Chart 6). That would suggest Q1 2025 could be stronger than the ECB assume.

We have taken profit on short ERZ5 but remain paid 10Y EUR swaps.

French PM Bayrou sets out his policy stance this week (Tuesday, 2pm UKT). As he has chosen to make the speech via Article 50-1 (rather than 49-1), there will not automatically be a vote, but the far-left LFI has promised a vote of no-confidence after the speech. The survival of the government requires at least finding a majority that will not vote against them.

The government is explicitly supported by LR, but will likely also need the Socialists (PDS) and Green (Eco) parties not to vote against them ahead. Both parties require pension reforms to be softened. A six-month pause on pension reform has been mooted, but LR seem dead against even this. Macron is less dogmatic, requiring only that whatever cost saving is lost by delaying pension reform be found elsewhere (€2-3.5bn cost in 2025 if suspended).

If PM Bayrou successfully navigates getting PDS and Eco on side while retaining LR support, there could be some knee-jerk French positivity. But if it comes at the cost of a continued deficit blowout, the market may be less generous.

I still expect new elections in H2 and a negative market reaction. As such, we have entered a strategic 10Y OAT/Bund widener, fading any rallies, targeting 100bp.

Ben Ford – $-Bloc & Scandies

We remain short AUD/NZD (target: 1.06; stop loss: 1.13) despite the strong Melbourne Institute Inflation reading.

The Monthly MI trimmed inflation reading (+0.39% MoM) was the strongest since last December 2023 (+0.9% MoM) and the fourth consecutive acceleration for the indicator’s monthly pace (Chart 7). It also indicates the strongest quarterly read since Q3 2023.

Taken at face value, this is concerning. It would slow the RBA’s desire to cut (market leaning towards February cut, while it is favoured by most economists). However, we think the indicator’s strong quarter is more a reflection of last quarter’s weak outing. Moreover, Q3 and Q4 together were weaker than Q1 and Q2 together. So, if we are right, then the trend for easing trimmed mean inflationary pressures should continue.

AUD opened sideways against a basket of currencies. We expect AUD to depreciate against NZD over the coming months. We target 1.06.

(The commentary contained in the above article does not constitute an offer, a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)