Source: Wind

Overnight, the three major US stock indices fell, with the Nasdaq Index breaking below the 20,000-point mark. The market is focused on the fluctuations in US inflation data, which will influence the Federal Reserve's interest rate cut process in 2025.

A report released by the US Bureau of Labor Statistics on Thursday showed that the Producer Price Index (PPI), which measures final demand, rose 0.4% month-on-month, marking the largest increase since June and exceeding market expectations of 0.2%. Compared to a year ago, the PPI surged 3%, the largest increase since March 2023, and also above market expectations of 2.6%.

Previously, the market seemed indifferent to the inflation data released on Wednesday, which showed that the Consumer Price Index (CPI) in the USA rose 2.7% year-on-year in November, higher than the 2.6% in October.

However, this data also confirms a troubling trend: the decline in inflation has stagnated. The core CPI, excluding food and Energy, rose 3.3% year-on-year, similar to the increases in recent months. Particularly concerning is service-related inflation, which, excluding energy services, saw a year-on-year increase of 4.6%.

But the CPI data seems insufficient to dispel the Federal Reserve's plan to continue cutting interest rates at the December meeting. According to CME FedWatch, as of Wednesday, the futures market anticipated a 96% chance of the Federal Reserve cutting rates in December. The market believes that the slowdown in hiring over the past few months still provides the Fed with room for moderate easing. Although factors like labor strikes and hurricanes have caused short-term fluctuations in the data, the long-term trend remains clear: the average number of new jobs added over three months has fallen to 0.173 million, down from 0.243 million at the beginning of 2024.

CME FedWatch shows that after December, the market now expects the Federal Reserve to possibly cut interest rates two to three more times by the end of 2025, with each cut being 25 basis points.

However, this expectation may be overly optimistic. Despite the slowdown in job growth, the US labor market still shows some increase, and the overall economic momentum remains strong, with the annualized growth of the real GDP in the USA for the third quarter of 2024 at 2.8%. Inflation is now stabilized around 3%, above the Federal Reserve's target of 2%, so what sufficient reason is there to continue cutting interest rates?

Not to mention the tax cuts and other policies that the USA government may introduce, the specific implementation time and content of these policies are still uncertain, but they may bring inflationary pressure. The Federal Reserve has publicly stated that it is not currently considering the impact of these policies. However, the publicly available data is already sufficient to support the Federal Reserve's decision to pause interest rate cuts, which allows for the determination of what changes the USA government's future policies may bring.

Former Cleveland Federal Reserve Bank President Loretta Mester stated, "I do believe that the pace of interest rate cuts by the Federal Reserve will slow down in 2025," as inflation will continue to show signs of stickiness.

This former Federal Reserve policymaker still expects a rate cut in December, but he added that the previous prediction of four rate cuts in 2025 "must be reconsidered". He stated that two to three rate cuts in 2025 "seems correct to me."

EY Chief Economist Greg Daco stated that the market "is very confident that the Federal Reserve will continue to cut rates by 25 basis points in December," although "I think the odds are closer to a coin toss," because inflation remains quite stubborn.

Daco indeed expects the Federal Reserve to cut rates in December, but he predicts this will be accompanied by a signal that two rate cuts in 2025 will have "longer intervals". He added that as policymakers adapt to the USA government's new policies, investors should expect the Federal Reserve to pause rate cuts in the future. He stated, "I believe the Federal Reserve will take a cautious approach."

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Editor/rice