The spotlight will be on inflation as US markets navigate a relatively light economic calendar this week.
Key data releases on the Consumer Price Index (CPI) on Wednesday and the Producer Price Index (PPI) on Thursday are expected to influence both investor sentiment and the Federal Reserve's policy decisions ahead of its December 18 meeting.
The inflation data this week will be pivotal. Deutsche Bank forecasts November's headline CPI to rise 0.3%, driven by increases in food and energy prices, while core CPI is expected to rise 0.27%. If these projections hold, the year-over-year headline inflation rate would round up to 2.8%, with core inflation steady at 3.3%.
Particular attention will be paid to rent components, which are anticipated to tick up slightly, as well as categories like used vehicles and apparel, which could see price rebounds. Conversely, airfare prices may decline after significant increases in recent months.
The PPI report on Thursday will provide further insights into categories that influence the core Personal Consumption Expenditures (PCE) index, the Fed's preferred inflation gauge. Deutsche Bank projects a 0.18% gain in November's core PCE index, factoring in October’s decline in asset prices.
Fed decision hinges on data
Federal Reserve Governor Christopher Waller recently indicated a preference for another rate cut at the upcoming meeting, contingent on employment and inflation data. While the November jobs report may not have shifted opinions significantly, stronger-than-expected inflation data could prompt the Fed to reconsider its stance.
Deutsche Bank maintains its baseline expectation for a 25-basis-point rate cut next week. However, the Fed’s messaging is likely to emphasize a slower pace of easing going forward.
A meaningful upside surprise in this week’s inflation reports could lead policymakers to pause rate cuts earlier than anticipated, analysts noted.
Market implications
A stronger-than-expected CPI or PPI print could stoke concerns about persistently high inflation, potentially pushing Treasury yields higher and weighing on equity markets. Conversely, in-line data might reinforce expectations for gradual easing, supporting risk assets.
Investors will also tune in for clues on the Fed's outlook for 2024, particularly regarding the pace and magnitude of further monetary easing.