December CPI came in at +7% y-o-y as expected, the highest reading since June 1982. Core CPI reached +5.5% y-o-y. Inflation is still amplified by supply-chain disruptions, especially the new cars / used cars category. Rents is another area of focus, but they rose 0.4% m-o-m, broadly in line with the average in the past four months. Services ex. energy rose in line with the average gain in 2021. In general, US inflation is about to peak in y-o-y terms, but the descent (driven by easing supply chain bottlenecks and commodities' base effects) is likely to be slowed by the ongoing firmness in services inflation. Most market participants expect headline CPI inflation to edge below 3% y-o-y by year-end. The December PPI came in at 0.2% m-o-m versus expectations at +0.4% marking the slowest gain since November 2020. The y-o-y reading was +9.7% below expectations at +9.8% and +9.8% in November. The core PPI measure came in at +0.5% in-line-with expectations, or at +8.3% y-o-y versus consensus at +8.0%.
At his Senate confirmation hearing, Fed Chairman Jerome Powell said high inflation was a severe threat to a full US economic recovery and the Fed was preparing to raise interest rates because the US economy no longer required emergency support. Other Fed officials had hawkish declarations indicating a March interest rate hike. Fed funds futures moved to price a 93% chance of a rate hike in March, which marks the highest closing probability to date.
The December inflation report shows easing for both CPI and PPI inflation. December Headline CPI inflation eased to 1.5% y-o-y vs. 2.3% in November, staying flat m-o-m. PPI eased notably to 10.3% y-o-y vs. 12.9% in November, falling 1.2% m-o-m. The easing in the headline CPI was led by: easing in food prices (-0.3% m-o-m), with steady pork prices (+0.4% m-o-m) and easing vegetable prices (-8.3% m-o-m); and easing energy prices (vehicle fuel prices fell 5.2% m-o-m). Core CPI remained modest in December, rising 1.2% y-o-y or 0.1% m-o-m, as domestic consumption recovery stayed modest. Chinese exports went up +20.9% y-o-y slightly above markets expectations at +20.0%, while imports in December rose to +19.5% y-o-y versus the +28.5% forecasted. It resulted in a trade surplus of $94.46bn well above consensus at $74.50bn. Overnight, the PBOC lowered its policy rates, 7-day reverse repo rate (from 2.2% to 2.1%) and 1-year MLF, medium-term lending facility, interest rate (from 2.95% to 2.85%). This is the first policy rate cut since April 2020, and shortly after the 5bps reduction of loan prime rate (LPR) by banks on December 20, 2021.
After a full week of security talks between Russia, NATO and the OSCE, negotiations reached a dead-end. Positions are seemingly irreconcilable, especially regarding Russia’s demand that NATO does not accept any new member states (in particular Ukraine). If tensions escalate, possible additional US sanctions against Russia range from a strengthening of the existing measures against individuals and firms in specific sectors (energy, defense and banks) to attempting to cancel Nord Stream or cutting Russia off from the SWIFT payment system. Markets reacted strongly to the news and European natural gas futures moved +13.71% higher.