On the eve of Thanksgiving, the market may face a piece of "bad data"!
The inflation data most favored by the Federal Reserve may continue to deviate from the 2% target!
As most Federal Reserve officials expect interest rates to be lowered in the future, a key report on Wednesday is expected to show inflation further deviating from the Federal Reserve's target.
At 11 PM Beijing time on Wednesday, the U.S. Department of Commerce will release the October PCE price index, which is the inflation data most favored by the Federal Reserve.
Economists surveyed by Dow Jones expect the overall price index to rise 0.2% month-over-month, while the core inflation rate, excluding food and energy, is expected to rise 0.3% month-over-month. Although both readings are the same as in September, the year-on-year growth rates are expected to rise to 2.3% and 2.8%, respectively. While this is an improvement from the mid-2022 peak, both trends indicate that the Federal Reserve has yet to achieve its 2% inflation target.
More importantly, the market is beginning to anticipate Trump's presidential election victory and his growth-promoting agenda, as well as the plans to impose hefty tariffs on global imported goods, which may make the Federal Reserve's task more difficult. Deutsche Bank's senior U.S. economist Brett Ryan stated in a report, "Recent data shows that progress on inflation has slowed, and this policy mix will reinforce these signals."
In fact, even though Federal Reserve officials have expressed their intention to continue lowering interest rates, Ryan predicts that the core PCE inflation rate "will stagnate at" 2.5% or higher until 2026. Recent markets are also increasingly skeptical about the Federal Reserve's ability to ease policies.
According to the CME Group's FedWatch tool, on Tuesday the market expected the implied probability of the Federal Reserve continuing to cut rates in December to be slightly above 50%, and it is anticipated that by the end of 2025, the federal funds rate will drop by 75 basis points. Deutsche Bank's U.S. economist Matthew Luzzetti even predicts that the Federal Reserve will make its last rate cut of 25 basis points in December and then pause.
BlackRock experts stated in their weekly market report on Monday that, "Recent data shows that wage growth remains high, indicating that core inflation is unlikely to easily fall near the Federal Reserve's 2% target. With signs that inflationary pressures may persist becoming more evident, the market has digested expectations for rate cuts from the Federal Reserve and is increasingly aligning with our aforementioned views."
