(Bloomberg) — Treasury yields sank as inflation showed further signs of easing, which could make the case for the Federal Reserve to continue slowing its pace of rate hikes and prevent a harsher economic downturn.
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The swap market showed less than 50 basis points of tightening priced in for the next two Fed meetings — implying a small chance of no move at all in March. Two-year US yields tumbled as many as 11 basis points. The dollar hovered near is lowest since June. Stocks posted a small advance after swinging between gains and losses.
When paired with prior months’ lower-than-expected readings, the December CPI may indeed pave the way for the Fed to downshift to a quarter-point hike at its next meeting ending Feb. 1. That said, the central bank’s work is far from over. Resilient consumer demand, particularly for services, combined with a tight labor market threaten to keep upward pressure on prices.
“Today’s CPI reading is another sign that inflation is heading in the right direction and indicates the peak is likely in the rear view,” said Mike Loewengart, head of model portfolio construction at Morgan Stanley Global Investment Office. “The market’s timid initial response may be a sign that while they acknowledge inflation is slowing, rate cuts likely aren’t on the agenda anytime soon.”
To Krishna Guha at Evercore ISI, while Thursday’s report is consistent with the Fed slowing the pace of rate hikes to 25 basis points in February, he also expects the central bank to make a “hawkish 25.”
That would possibly be in line with what a raft of Fed officials has been recently telegraphing. In other words, they have signaled openness to making a 25 basis-point rate increase right at their next meeting, while also stressing that the central bank still has more work to do to tame prices — and are not anticipating rate cuts this year.
One clear example came this morning, when Federal Reserve Bank of Philadelphia President Patrick Harker said the central bank should lift interest rates in quarter-point increments “going forward.” At the same time, he also reiterated that officials expect to hold rates at higher levels to give them time to travel through the economy.
Read: Fed’s Bullard Favors Getting Rates Above 5% ‘Soon As Possible’
Key events this week:
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China trade, Friday
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US University of Michigan consumer sentiment, Friday
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Citigroup, JPMorgan, Wells Fargo report earnings, Friday
This week’s MLIVE Pulse Survey:
Some of the main moves in markets:
Stocks
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The S&P 500 rose 0.3% as of 12:10 p.m. New York time
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The Nasdaq 100 rose 0.2%
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The Dow Jones Industrial Average rose 0.6%
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The Stoxx Europe 600 rose 0.6%
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The MSCI World index rose 0.7%
Currencies
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The Bloomberg Dollar Spot Index fell 0.7%
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The euro rose 0.7% to $1.0827
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The British pound rose 0.3% to $1.2187
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The Japanese yen rose 2.1% to 129.71 per dollar
Cryptocurrencies
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Bitcoin rose 3.3% to $18,135.54
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Ether rose 3.2% to $1,385.75
Bonds
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The yield on 10-year Treasuries declined five basis points to 3.49%
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Germany’s 10-year yield declined five basis points to 2.16%
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Britain’s 10-year yield declined eight basis points to 3.33%
Commodities
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West Texas Intermediate crude rose 1.5% to $78.55 a barrel
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Gold futures rose 0.9% to $1,895.80 an ounce
This story was produced with the assistance of Bloomberg Automation.
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