The markets rallied as the CPI posted the smallest monthly advance in more than a year, indicating the worst of inflation has likely passed and validating an anticipated slowing in the pace of Federal Reserve rate hikes.

Excluding food and energy, the CPI rose 0.2% in November and was up 6.0% from a year ago.  The overall CPI increased 0.1% from the month prior and was up 7.1% from a year earlier, as lower energy prices helped offset rising food and shelter costs.

Analysts had expected a 6.1% and 7.3% increase, respectively.

Today is the conclusion of the FOMC meeting and the Fed has been clear that it does not want to declare victory prematurity.  With this written however, the Fed’s guidance has been useless or at least swiftly out of date.

It is largely expected the central bank will increase the overnight rate today by 0.50% to 4.5%, the highest level since 2007.

The Fed will also issue its quarterly outlook and most central bank economists have the 2023 “Dot Plot” topping out at 5.0% to 5.25%, a 50 bps rise from the September’s Fed peak dot of 4.65%.

According to Bloomberg, the CPI fixing swap market now has the headline inflation rate dropping to 2.4% by next June and staying there through November

Today’s inflation rate of 7.1% is considerably higher than the Fed’s speed limit of 2.0%.  The odds of inflation falling to this level in the next twelve months is extraordinarily low, a decline that would be in the record books.

Equity markets reversed about 65% of the post CPI gain, perhaps fearing a more hawkish post FOMC meeting statement and perhaps from the realization that the inflation is still considerably higher than mandated limits.

The post FOMC meeting statement is at 2:00 P.M.

Following the Fed, the markets will also have to contend with monetary statements/decisions from the ECB, the BOE and several larger pacific rim countries, all of which could influence the direction of the dollar and exchange rates.

Last night the foreign markets were mixed.  London was down 0.24%, Paris down 0.28% and Frankfurt down 0.45%.  China was up 0.01%, Japan up 0.72% and Hang Seng up 0.39%.

Futures are flat.  The 10-year is off 1/32 to yield 3.51%.


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