December’s CPI report gave the markets some temporary relief from the pressure they’ve been under the past three weeks. A lower-than-expected month-over-month increase in the core inflation rate suggests there may be some stabilization happening in the low 3’s range, while trending towards the high 2’s over the next few months. That’s still not terribly close to the Fed’s ultimate 2% target though and will prevent the central bank from making a sudden dovish policy pivot. The market is now pricing in a roughly 55% chance of a second rate cut this year, up from about 30% a week ago. It moved the needle a little bit, but not enough to change the big picture. There’s a lot of data still suggesting that re-inflation is happening and the Fed is likely going to be unable to provide much, if any, monetary support in 2025.
The Bank of Japan meets again on Friday of this coming week to set policy. If the latest chatter is to be believed, it sounds like that as of right now it’s more likely than not that they’ll hike to 0.5%. That could still potentially change with the Trump inauguration and any “day one” tariff threats he might make, but the case for a rate hike is pretty easy to make at this point. The country’s inflation rate has jumped to 2.9% (the December reading, scheduled to drop just a day before the meeting this coming week, could hit 3%) and wage growth is still strong. Even though growth is still stagnating, inflation and a weak yen are going to be primary considerations and both are arguing for a hike.
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3Invesco: "Why Mid Caps Now"
4Ned Davis Research
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If/when that happens, look out. The yen has strengthened somewhat over the past few days, but not to the level, in my opinion, that would reflect a quarter-point hike. Remember, the last time the BoJ hiked, it ignited a rally where the yen went from 160 to nearly 140 before it stopped. I don’t know if we’ll see that fierce of a rally again this time, but a strengthening is almost certainly in order. That means the reverse yen carry trade is back on the table, which could add a fair amount of volatility to all asset classes and result in a pullback in U.S. stocks. And it could all finally start happening this coming week.
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