Slowdown in US inflation
The US Consumer Price Index (CPI) for December met expectations, with the headline rate dropping to 6.5% YoY, the lowest level since October 2021 and the sixth consecutive month of decline since its peak at 9.1% YoY in July. The core CPI, which excludes food and energy, also decreased from 6% YoY to 5.7% YoY. However, both readings remain well above the Federal Reserve’s target rate of 2%. The markets focused on the December’s month-over-month (MoM) CPI, which came in at -0.1%, the first negative reading in the MoM series since May 2020.
The markets are now predicting a 94% probability of a 0.25% interest rate increase by the Federal Open Market Committee (FOMC) during its meeting on February 1st, which is an increase from the 75% chance earlier in the week. Additionally, some experts suggest that the “shelter” component of the CPI may be too high and is lagging behind the other components, which could potentially lead to a decrease in the CPI in the upcoming months.
The Consumer Price Index (CPI) has decreased to 10.7% in November after reaching a peak of 11.1% in October, which could indicate that the peak has passed. It is predicted that December’s inflation figures will reveal that inflationary pressures are continuing to decrease but will still remain in double digits. Food price inflation is currently in the mid-teens, which suggests that the headline Consumer Price Index (CPI) will stay above 10%.
Therefore, it is likely that the Bank of England will implement another significant interest rate increase in the next 2 weeks.
Eyes on BoJ Meeting
The Bank of Japan is holding its meeting on Wednesday, and while it is expected that interest rates will remain the same, traders anticipate that some form of Quantitative Tightening may occur as the BoJ is conducting a comprehensive review of its Monetary Policy.
Last month, the BoJ surprised the markets by modifying its Yield Curve Control (YCC) by widening the range for the 10-year Japanese Government Bonds from -/+0.25% to -/+0.50%. Despite the Governor of the Bank of Japan, Kuroda, claiming that this move is not a form of quantitative easing and that the Monetary Policy will remain supportive, traders are skeptical. Some have even suggested that the BoJ may completely abandon its YCC. Due to these expectations, traders have been buying Japanese Yen since Thursday to prepare for any potential surprises.