Market Reacts to Inflation Data: Fed Rate Cut Expectations Shift

Quiver Quantitative – In the wake of a closely watched inflation report, traders have slightly scaled back their expectations for Federal Reserve rate cuts in 2024, signaling a cautious approach to the central bank’s future monetary policy. The anticipation of easing measures was tempered after the latest data revealed inflation figures largely aligning with forecasts. Market reactions were immediate, with a minor decrease in projected rate cuts and a subsequent climb in benchmark two-year yields. This shift in trader sentiment has led to a flattening of the Treasury yield curve, underscoring the market’s sensitivity to inflation trends and Fed policies.

As the financial community digests this latest inflation data, attention now shifts to upcoming significant events that could further influence market dynamics. These include a 30-year Treasury bond auction in New York and the Federal Reserve’s two-day policy meeting. With the Fed’s rate decision and officials’ quarterly US rate expectations due on Wednesday, investors are closely monitoring these developments for clues on the direction of future monetary policies.

Phillip Neuhart, director of market and economic research at First Citizens Bank Wealth Management, noted that while the annual headline inflation rate showed improvement, core inflation remains notably above the Fed’s 2% target. This persistent high core inflation rate, which excludes volatile food and energy costs, suggests the Federal Open Market Committee (FOMC) will likely require more significant signs of underlying inflation slowing before considering rate reductions. The core consumer price index’s latest figures, rising 0.3% last month following a 0.2% increase in October, have kept market participants and the Fed on alert.

Investors are also bracing for the outcome of the 30-year bond auction, particularly after November’s auction displayed very poor demand, resulting in a notable yield spread. This outcome, combined with lukewarm responses to separate sales, has added to market apprehension. Additionally, all eyes will be on Fed Chair Jerome Powell’s upcoming address and the updated “dot-plot” of quarterly forecasts, with most expecting a slight adjustment to indicate a total of 50 basis points in rate reductions for 2024. These events are critical in shaping market expectations and will likely influence trading strategies in the near term.

This article was originally published on Quiver Quantitative