Yields Above Pre-CPI Levels

STOCK INDEX FUTURES

The indexes are mixed, with the S&P and Dow hovering near flatline while the Nasdaq got a boost from tech giant Oracle. November’s CPI report brought some volatility to markets yesterday, as it may have some holes in it due to the data collection process. Consumer prices rose 2.7% year-over-year in November, well below forecasts of 3.1% and a drop below September’s 3.0%. Core prices rose 2.6% year-over-year, below forecasts and September’s reading of 3.0%. Markets will need to wait until January for a clearer picture on prices.

However, sentiment remains supported by expectations that the Fed will have scope to continue cutting interest rates next year. Oracle shares climbed more than 4% in premarket trading, providing an additional boost after ByteDance, owner of TikTok, agreed to sell the app to a joint venture involving Oracle and private-equity firm Silver Lake. Micron Technology added 1.6%, extending its 10% surge from Thursday. On the downside, Nike shares plunged more than 10% after the company reported weaker revenue in China, while higher tariffs weighed on gross margins. FedEx traded little changed, as its quarterly results failed to impress investors.

CURRENCY FUTURES

US DOLLAR: The USD index is higher as markets digested November’s inflation report, which surprised to the downside but did bring some scrutiny, as several Fed officials, including Chair Powell, noted that the shutdown likely distorted the figure lower. The shutdown limited the BLS’s ability to collect October prices and assess month-over-month changes and also necessitated the BLS to implement a technical fix, which could have biased the results downward. Despite signs of easing inflation, uncertainty remains over the Fed’s rate path, with policymakers divided after a third consecutive rate cut and Chair Powell warning the CPI figures may be distorted by the shutdown. Markets remain pricing in two rate cuts for 2026, while the Fed’s summary of economic projections was unchanged at just one. Powell suggested a rate hike is off the table and that it was not any policymaker’s base case.

EURO: The euro slipped lower after European Central Bank President Christine Lagarde on Thursday offered no surprises nor forward guidance and said all options were on the table, pushing back against more hawkish members. The ECB left borrowing costs unchanged in a widely expected move and raised some growth projections as well. Inflation is still seen dipping below 2% next year and in 2027, mostly on lower energy costs, but is then expected to come back to target in 2028, underpinning policymakers’ arguments that no policy change was needed now. Growth is expected to be slightly stronger this year than earlier predicted, as the bloc is proving more resilient than feared to global trade tensions and Chinese goods dumping. Growth in 2025 is expected to land at 1.4% (prev. 1.2%), 2026 GDP is now forecasted to grow 1.2% (1.0% prev.), while 2027 growth is expected at 1.4% (prev. 1.3%). Economic growth in the country continues to prove to be resilient, while inflation remains close to the bank’s 2% target. On the political front, European Union leaders decided on Friday to borrow cash to fund Ukraine’s defense against Russia for the next two years rather than use frozen Russian assets, sidestepping divisions over an unprecedented plan to finance Kyiv with Russian sovereign cash.

BRITISH POUND: The pound edged lower against the dollar after the Bank of England lowered its key interest rate to 3.75% in a widely expected move on Thursday, while signaling some caution about the pace of further rate cuts. The decision, however, brought a tight vote with a 5-4 split, with four of the committee’s members voting to keep rates steady at 4%, resulting in Governor Andrew Bailey casting the deciding vote. Inflation data out on Wednesday showed that price pressures eased to an annual rate of 3.2% in November, down from 3.6% in October and its lowest reading since March. Bailey said that rates appear to be on a gradual downward path, and the BoE expects inflation to fall “closer” to its 2% target in April, compared with November forecasts that expected inflation to reach 2% by mid-2027, as a reduction in energy bills and other policy measures from the government takes place. However, Bailey also noted, “With every cut we make, how much further we go becomes a closer call.” Markets are still expecting one more cut by the bank in either April or June of 2026, with June’s cut being fully priced in, whereas a cut in April was previously fully priced in before the meeting, but if inflation continues to fall more rapidly, the bank could be prompted to lower rates further.

JAPANESE YEN: The yen fell lower after the Bank of Japan raised interest rates to 0.75% but did not offer much guidance regarding how far the bank could raise rates. The yen, which is now trading around $157.28, is near levels that historically have brought official buying from the government. The BoJ maintained its view that underlying inflation will converge around its 2% target in the latter half of its three-year projection period through fiscal 2027. It reiterated real rates were at “significantly” low levels even after the hike and pledged to continue tightening should the economy and inflation pan out as forecast, saying the pace and timing of further hikes will depend on how the economy reacts to each policy shift. Japanese trade data out Tuesday evening rose well above expectations as exports rose 6.1% in November, surpassing forecasts of 4.8% and marking the strongest growth in nine months. Shipments to the US climbed 8.8%, the first increase in eight months, due to demand for pharmaceuticals, mineral fuels, and construction machines. Core machinery orders, a key leading indicator of capital expenditure over the next six to nine months, also jumped 7%, defying expectations of a 2.3% decline.

AUSTRALIAN DOLLAR: The Aussie is lower as a stronger dollar weighed on the currency. Markets gradually expect a rate hike next year out of the central bank, with a move in February priced at 25%, 40% in March, and 70% in May. Minutes from the Reserve Bank of Australia’s December policy meeting are due next week and will provide some insight around the board’s deliberations about a possible future tightening and its concerns about inflation. Labor figures last week showed a surprise drop in employment, which led markets to slightly scale back bets on a rate hike next year. Employment in Australia fell by 21,300 in November as full-time jobs more than reversed a large increase the previous month. However, the unemployment rate held steady at 4.3% despite markets forecasting a rise to 4.4% as fewer people went looking for work. However, the RBA still views the labor market as tight, citing high job vacancies, widespread staffing shortages, rising labor costs, and other indicators that the economy remains near full employment.

INTEREST RATE MARKET FUTURES

Yields are higher across the curve, reversing a drop from the previous sessions as markets digested November’s CPI report, which showed that inflation rose 0.2% between September and November, below expectations of a 0.3% rise. Core inflation also rose at the same pace, reflecting a wave of disinflation over the period. Easing shelter (0.2% vs. 0.4%) and food (0.1% vs. 0.2%) prices helped bring the headline reading down despite a 1.1% rise in energy costs. However, the technical fix that was required to collect some of the data due to the shutdown may have biased the figures downward. NY Fed President Williams earlier this morning also said that some “technical factors” distorted November’s CPI reading downward. Markets will have to wait for December’s reading to fully understand how price pressures have moved and could see an upward revision to the data.

The data comes after November’s jobs report showed payrolls increased by 64,000 in November, more than expected, while an abbreviated October estimate showed a decline of 105,000. October’s steep drop can be attributed to a large number of federal employees coming off payroll who had opted to take a deferred resignation, while data collection efforts were hampered by the government shutdown. October’s figure is likely to see continued revisions. The Labor Department revised down payrolls for both September and August, for a total gain of 82,000 jobs, instead of the 115,000 previously reported. Meanwhile, the healthcare sector continues to hold up the labor market as private nonfarm payrolls rose by 121,000 over October and November. During that time period, the healthcare and social-assistance sector gained 128,600 jobs.

For officials at the Fed, the uptick in the unemployment rate will be a talking point as it signals that the balance of labor demand and supply is changing. However, the jump in unemployment is not as big as it seems at first glance. The September figure was rounded down to 4.4%, and the November figure was rounded up to 4.6%, so the gap between them was closer to 0.12% rather than a full 0.2%. Still, November’s uptick in unemployment suggests that the level of hiring is below what is needed.

The spread between the two- and 10-year yields fell to 65.70 bps, while the two-year yield, which reflects short-term interest rate expectations, rose to 3.492%.

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