Related Insights
Market participants will be scrutinising this week’s CPI data to gauge if disinflation has stalled. Consensus expects headline and core CPI to be 0.3% MoM and 0.2% MoM respectively. Going forward, inflation should face upside risks from tariffs (at least optically), in whatever form that they will finally be delivered by the Trump administration. Given that ISM prices paid shot up last month, there would likely to be unease that even the threat of tariffs could have an inflationary impact on prices. Moreover, we would also keep an eye on rising oil prices (WTI is now trading at USD 78/bbl). If US inflation turns out to be sticky around 3%, there would no longer be any narrative for the Fed to cut rates from this angle.
Investors have taken notice, pushing up 2Y breakevens to 2.79%, up from around 1.6% in September. As inflation worries rise and growth worries dissipate, rate cut bets are pushed even further back. The market is pricing in just 29bps of cuts by the end of 2025. At this point, even if CPI stays sticky, we think that the hurdle for the Fed to flip to rate hikes is probably high. There will be considerable uncertainties from Trump’s policies and it will probably be more prudent from a policy maker’s perspective to wait and see how events play out. Accordingly, we think that upside to short-term UST yields are likely capped for now. 
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