Geopolitics and politics in general are taking centre stage in financial markets at the moment. From Venezuela to Iran, and from credit card caps to Fed independence, there are multiple themes currently driving markets – such is the way in the time of Trump 2.0. Typically, these narratives don’t often linger for long or impact markets too much, but certainly the questions around Fed independence have returned with Fed Chair Powell’s extraordinary response to being served with grand jury subpoenas.
Regarding the calendar, there’s not a lot of top tier data this week which is often the case after the US monthly employment report, but Tuesday sees the release of important inflation CPI figures. Data collection issues stemming from the longest-ever US government shutdown led to a surprisingly soft November CPI report. Most economists now expect a lot of these distortions should be unwound in the December data. That means the monthly pace of consumer price inflation is forecast to pick up in December relative to November’s suppressed pace.
Consensus expectations
December CPI is predicted to show the headline print rising at 0.3% m/m and 2.7% y/y, and the core at 0.3% m/m and 2.7% y/y. The collection disruptions during the government closure amplified seasonal discounting in November. Goods prices are expected to rebound more sharply than services, while tariff pass-through appears to be moderating. Services inflation should also firm, while shelter inflation is seen following its pre-shutdown trend. Statistical quirks may still persist, particularly in housing, which means shutdown-related softness in shelter inflation may linger into the second quarter.
Among other inflation gauges, the New York Fed’s monthly survey of consumer expectations rose in December, with consumers expecting 3.4% price growth over the next year, up from 3.2% in November, while longer-term expectations were steady. In December, ISM data, manufacturing prices remained in expansion, matching November, while the flip side saw the services prices index fell to its lowest since March 2025, though it has still exceeded 60 for 13 straight months.
Fedspeak on inflation
Recent FOMC commentary from the latest minutes said inflation had fallen a long way from the peak but was still a bit too high and vulnerable to tariff and fiscal shocks, so policy should only be eased gradually. Fed Chair Powell said it remained somewhat elevated to the 2% goal and that recent data hadn’t changed that picture much. The Fed’s latest projections see headline PCE inflation at 2.4% and core at 2.5% by year-end, with a return to target only by 2028. Of course, there is a wide split of views on the committee with some thinking further rate cuts are warranted if inflation drifts lower while others are not convinced inflation is on a sustainable path to 2%.
Market reaction
Odds of a January rate cut got reined in after the lower jobless rate seen in NFP on Friday. The one in five chance is now around 5% only. There is less than a 50% chance of a move up until May and Powell’s last FOMC meeting. A stronger print is needed to wipe out these odds, and we note many investment banks have now pushed back a lot of their rate cut forecasts.