Fed to cut rates by 50bps in December, Citi strategists say

Investing.com -- Citi strategists expect the Federal Reserve to slash rates by 50 basis points (bps), noting that this week’s upcoming October inflation data is “unlikely to change the reflation narrative.”

Markets are set to receive updated October inflation data with Wednesday’s release of the Consumer Price Index (CPI), alongside upcoming reports on wholesale inflation and retail sales.

In recent weeks, the market narrative has swung back toward concerns over resurgent inflation and a limited scope for Fed rate cuts, positioning CPI data as nearly as crucial as employment data in shaping the Fed's path in the eyes of investors.

“We continue to think overall slowing inflation and a weakening labor market will have Fed officials cutting rates more over the next 6-9 months than the market currently expects,” strategists Veronica Clark and Andrew Hollenhorst said in a note.

Strategists expect a core CPI increase of approximately 0.26% month-over-month for October. Another rise of 0.3% in core CPI, they suggest, could reinforce inflation concerns in the market. However, they believe that specific CPI components, such as elevated used car prices, health insurance, and a further easing in shelter inflation, should still encourage the view that underlying inflation trends are slowing.

Citi projects core PCE inflation to grow by 0.24% month-over-month in October, partly due to robust elements in recent PPI data.

A stronger inflation figure, following the 0.25% rise in core PCE inflation for September, could prompt markets to further reduce expectations of a December rate cut. Yet, Citi’s team points out that anticipation for another stronger inflation reading has already built up, and volatility across some components may lead to underestimated downside risks.

In their view, weaker inflation and employment data for November will likely lead to at least a 25 basis point rate cut in December, with a 50 basis point cut in their base-case scenario.

Citi's forecast of a 0.26% month-over-month rise in core CPI is driven by several factors, including a 0.16% increase in core goods prices, a 0.32% rise in shelter prices, and a 0.26% increase in core services excluding shelter prices, which is softer than the previous month.

For headline CPI, the Wall Street firm projects a 0.2% month-over-month and a 2.6% year-over-year increase, reflecting softer energy prices. It sees downside risks in the food away from home component of headline CPI, which could impact core PCE inflation.

Source: Investing.com