Trump vs CPI

US CPI for October was exactly in line with expectations. The headline rate of CPI rose to 2.6% YoY from 2.4% YoY in September. The core rate remained steady at 3.3%. The detail of the report shows that the shelter index rose by 0.4% on the month, which accounted for 50% of the increase in all items on a monthly basis. Aside from shelter, there were also increases for the food index, used cars and trucks, air fares, medical care and recreation. There were broad increases in most elements of the October CPI report, and very few declines, which suggests that inflation remains in the US system, albeit at a lower level than in the past.

One of two CPI reports before the next Fed meeting

Although inflation for October was in line with expectations, this does not guarantee a rate cut in December from the Fed. There is another CPI report due the day before the FOMC meeting, and the payrolls report for November will also be crucial after the October report was disrupted by weather events. In the aftermath of this CPI report, the probability of a rate cut from the Fed in December has shrunk to 58%, this is down from an 82% chance the day before the US election. There is a lot of economic data before the FOMC meeting, so this one data point will not be enough on its own to shift the dial for the Fed.

Interestingly, the financial markets have had a strong reaction to this data. Treasury yields are down sharply across the curve, which has dragged the dollar lower. GBP/USD is back above 1.2750, and EUR/USD is testing 1.0650. The headline level of inflation suggests that the disinflation process in the US is ongoing, although there are some bumps in the road. If inflation can continue on this path, with only mild increases or even some moderation, then we could see the Federal Reserve stick to back-to back rate cuts.

Trump vs economic data

The market will now be reliant on the next key economic data releases to determine what the Fed does next. For the last week, politics and the Trump trade have dominated financial markets. However, economic data is still important, and today’s CPI report is a reminder that the Fed will decide policy based on economic data, and not on speculation about what the Trump administration will do. Jerome Powell said explicitly last week that the FOMC forecasts for growth and inflation will not front run potential changes to economic policy under Trump, instead they will only impact their forecasts after they have been put into law. Thus, the market needs to focus on what the Fed is doing, and they are setting policy based on economic data.

The Trump trade is not dead, but it needs to merge with the US economic reality. Stocks are higher on the back of the inflation report, yields are lower, and so is the dollar. However, we think that any weakness in the dollar could be short lived and will depend on how far bond yields decline.

The key message from Wednesday’s CPI report is don’t forget about the economic data, it is more important than Trump’s election in the long run.