US core disinflation stalled; Fed not in a hurry to cut rates

·       Gold stumbled; the Trump admin may be planning to monetize/pledge/sell part of the Gold reserve held by the US to reduce TSY bond supply & yields

·       Wall Street closed the week in green on Trump tariffs delay and hope for last-minute trade deal

On Wednesday, the focus of the market was on U.S. inflation data for Jan’25 as it may influence the Fed's decision for any rate cut action in March. On Wednesday, the BLS data (NSA) showed the annual (y/y) US core CPI inflation edged up to 3.3% in Jan’25 against 3.2% sequentially and above the median market expectations of 3.1%. The 3MRA of US core CPI was 3.3% in Jan’25, still substantially above Dec’19 pre-COVID 3MRA and the Fed’s price stability targets for core CPI levels of 2.3%; i.e. Fed needs to bring down core CPI inflation to the least 2.3% on a sustainable basis to achieve its price stability targets.

Overall, the average US core CPI was at 3.4% in 2024 against 4.8% in 2023, 6.2% in 2022, and 2.0% in 2019. As per the current sequential run rate, the US core CPI inflation may come down to around 2.3% Fed targets by December’26. The US core CPI needs to go down at least 1.0%  from present levels of 3.3% for the Fed’s price stability target of core CPI inflation of around 2.3%, which is equivalent to core PCE inflation of around 1.5%. The Fed needs core CPI and core PCE inflation around 2.3% and 1.5% so that overall average core inflation remains around 1.9%, just below 2.0% official targets.

And Fed also needs to keep the US unemployment rate at least around 4.0% on a durable basis for its maximum employment on an average for the longer term, but also aspires to keep it down around historically low unemployment levels of 3.5% (pre-COVID) for a dream combination of maximum unemployment and price stability. Thus in the longer run, the Fed needs to bring down the unemployment number by around 50 bps to 3.5% from present levels of 4.0% to achieve the dual mandate of maximum employment and minimum price stability.

 

On Wednesday, the annually (2024) revised BLS data (SA) also showed the sequential (m/m) US core CPI surged 0.4% in Jan’25 from 0.2% in the preceding month and above the market expectations of 0.3%. Fed needs an average sequential core CPI rate of around 0.15% consistently for 2.0-2.3% core CPI targets in the longer/medium term, but it stalled at 0.3% in the last three months. Overall, the 2024 average was 0.3% against 0.3% in 2023, 0.5% in 2022 and 0.1% in 2019 (pre-COVID).

The U.S. Core service inflation (w/o energy service) edged down to 4.3% in Jan’25 from 4.4% sequentially and is still substantially above pre-COVID December’19 levels of 3.0%. The Fed is now closely focusing on core service inflation, which is still quite elevated and sticky led by Shelter/Housing inflation amid higher demand for housing an increasing number of immigrant workers (increasing population), and the legacy issue of lack of adequate supply of affordable housing in the US.

Unlike China, the US is unable to create affordable housing (PPP model/private/public), smart cities, and high-speed railways for the increasing population due to a lack of political bipartisan consensus between Democrats and Republicans. The US has been suffering long from political & policy paralysis to increase the supply capacity of the economy (both social and traditional infra) to meet increasing demand and balance inflation.

Moreover, now homeowners are not ready to accept lower rent due to higher demand and higher borrowing costs (home/mortgage loans). And so far, President-Elect Trump’s election campaign promises didn’t share any meaningful plan to ensure more supply of affordable houses (like Democrats) as Trump may be more interested in the premium housing segment as Trump himself is a big building developer/promoter before becoming US President.

The US Shelter inflation edged down to 4.4% in Jan’25 from +4.6% sequentially, but still substantially above pre-COVID (Dec’19) levels of +3.2%.

 

In Jan’25 the BLS data also shows the US super core CPI inflation (w/o food, fuel/energy, shelter/housing, used cars & trucks) unchanged at 2.4% since Oct’24, and still substantially higher than December’19 (pre-COVID price stability) levels of +1.7%.

In Jan’25, the annual US core CPI inflation was boosted by apparel, medical care products & services, alcoholic beverages, tobacco & smoking products, shelter, and used cars & trucks and transportation services, while dragged by new vehicles.

On Wednesday, the BLS data (NSA) also showed the annual (y/y) US total CPI inflation edged up to 3.0% in Jan’25 from +2.9% sequentially, above the median forecasts of +2.7% and the highest since August’24. The US food inflation was unchanged at 2.5%, while energy inflation rose by 1% after five consecutive months of decline (deflation). The US food inflation was around +1.8% in December’19 pre-COVID days, while energy inflation was around +3.4%, and total CPI (headline inflation) was +2.3%, at the Fed’s target and equivalent to total PCE inflation +1.5%.

Overall, the 3MRA of US CPI inflation was 3.0% in Jan’25 vs 3.2% yearly and 2.7% sequentially. The 2024-average US CPI was 3.0% against a yearly average of 4.1% in 2023 and 2.3% in 2019 (pre-COVID); officially the US Congress has given Fed price stability mandate of 2.0% CPI inflation on a sustainable basis; not core CPI or core PCE and even total PCE inflation.

However, the Fed usually takes the average of core PCE and core CPI inflation for any policy stance as core inflation generally gives a fair picture of underlying inflation (without volatile fuel/energy and food inflation); also there is always a difference of around 50-100 bps between core CPI and core PCE inflation. But ordinary Americans are now concerned with higher cost of living expenses, which is total CPI.

Overall, the US total CPI is now around 26% higher than pre-COVID Jan’19 levels (6-years) against the normal run rate of 15% (@2.0-2.5% per year). Higher cost of living and higher input costs for SMEs were some of the primary economic factors behind the anti-incumbent wave against the Biden-Harris admin and Trump’s win in the November’24 election. Ordinary Americans to influential politicians, all are now concerned about surging egg/food prices as elevated & sticky food inflation is enough to topple any incumbent government in Power (in any electoral democracy).

On Wednesday, the BLS data (SA) also showed the sequential (m/m) US CPI edged up to 0.5% in Jan’25 from 0.4% in the prior month, above median market expectations of +0.3% and higher than 3MRA of 0.3% and highest since Aug’23. The Jan’25 sequential/monthly inflation was boosted by a 0.4% increase in shelter costs. In addition, energy prices rose 1.1%, fueled by a 1.8% gain in gasoline. Food prices also increased, with food at home up 0.5% and food away from home rising 0.2%. Prices for eggs soared 15.2%, the largest increase since June 2015, due to supply shortages driven by bird flu.

Overall, the 3MRA of US sequential CPI was 0.4%, the 2024 average was 0.2% against 0.3% in 2023, 0.5% in 2024 and 0.2% in 2019.

Trump’s comments rather than the Fed or even Powell now moving the market:

On Friday (14th Feb’25), US President Trump wrote about reciprocal tariffs in his Truth handle:

“On Trade, I have decided, for purposes of Fairness, that I will charge a RECIPROCAL Tariff meaning, whatever Countries charge the United States of America, we will charge them - No more, no less! For purposes of this United States Policy, we will consider Countries that use the VAT System, which is far more punitive than a Tariff, to be similar to that of a Tariff. Sending merchandise, products, or anything by any other name through another Country, for purposes of unfairly harming America, will not be accepted.

In addition, we will make provision for subsidies provided by Countries to take Economic advantage of the United States. Likewise, provisions will be made for Nonmonetary Tariffs and Trade Barriers that some Countries charge to keep our product out of their domain or, if they do not even let U.S. businesses operate.

We can accurately determine the cost of these Nonmonetary Trade Barriers. It is fair to all, no other Country can complain and, in some cases, if a Country feels that the United States is getting too high a Tariff, all they have to do is reduce or terminate their Tariff against us. There are no Tariffs if you manufacture or build your product in the United States.

For many years, the U.S. has been treated unfairly by other Countries, both friend and foe. This System will immediately bring Fairness and Prosperity back into the previously complex and unfair System of Trade. America has helped many Countries throughout the years, at great financial cost. It is now time that these Countries remember this, and treat us fairly – A LEVEL PLAYING FIELD FOR AMERICAN WORKERS. I have instructed my Secretary of State, Secretary of Commerce, Secretary of the Treasury, and United States Trade Representative (USTR) to do all work necessary to deliver RECIPROCITY to our System of Trade!”

On Friday, Trump wrote about American workers:

“We want a level playing field for all American workers — I have instructed my Secretary of State, my Secretary of Commerce, Secretary of Treasury, and U.S. Trade Representative to do all necessary work to deliver reciprocity…”

On Friday, Trump wrote about his performance as the US President for the 1st three weeks:

“THREE GREAT WEEKS, PERHAPS THE BEST EVER, BUT TODAY IS THE BIG ONE: RECIPROCAL TARIFFS!!! MAKE AMERICA GREAT AGAIN!!!”

Earlier Trump also wrote about the Hamas/Gaza war and the Ukraine-Russia war:

“GREAT TALKS WITH RUSSIA AND UKRAINE YESTERDAY. GOOD POSSIBILITY OF ENDING THAT HORRIBLE, VERY BLOODY WAR!”

“I just spoke to President Volodymyr Zelenskyy of Ukraine. The conversation went very well. He, like President Putin, wants to make PEACE. We discussed a variety of topics having to do with the War, but mostly, the meeting that is being set up on Friday in Munich, where Vice President JD Vance and Secretary of State Marco Rubio will lead the Delegation. I am hopeful that the results of that meeting will be positive. It is time to stop this ridiculous War, where there has been massive, and unnecessary, DEATH and DESTRUCTION. God bless the people of Russia and Ukraine!”

“I just had a lengthy and highly productive phone call with President Vladimir Putin of Russia. We discussed Ukraine, the Middle East, Energy, Artificial Intelligence, the power of the Dollar, and various other subjects. We both reflected on the Great History of our Nations, and the fact that we fought so successfully together in World War II, remembering, that Russia lost tens of millions of people, and we, likewise, lost so many! We each talked about the strengths of our respective Nations and the great benefit that we will someday have in working together.

But first, as we both agreed, we want to stop the millions of deaths taking place in the War with Russia/Ukraine. President Putin even used my very strong Campaign motto of, “COMMON SENSE.” We both believe very strongly in it. We agreed to work together, very closely, including visiting each other’s Nations. We have also agreed to have our respective teams start negotiations immediately, and we will begin by calling President Zelenskyy, of Ukraine, to inform him of the conversation, something which I will be doing right now.

I have asked Secretary of State Marco Rubio, Director of the CIA John Ratcliffe, National Security Advisor Michael Waltz, and Ambassador and Special Envoy Steve Witkoff, to lead the negotiations which, I feel strongly, will be successful. Millions of people have died in a War that would not have happened if I were President, but it did happen, so it must end. No more lives should be lost! I want to thank President Putin for his time and effort concerning this call, and for the release, yesterday, of Marc Fogel, a wonderful man that I greeted last night at the White House. I believe this effort will lead to a successful conclusion, hopefully soon!”

“Hamas has just released three Hostages from GAZA, including an American Citizen. They seem to be in good shape! This differs from their statement last week that they would not release any Hostages. Israel will now have to decide what they will do about the 12:00 O’CLOCK, TODAY, DEADLINE imposed on the release of ALL HOSTAGES. The United States will back the decision they make! Hamas has just released three Hostages from GAZA, including an American Citizen. They seem to be in good shape! This differs from their statement last week that they would not release any Hostages. Israel will now have to decide what they will do about the 12:00 O’CLOCK, TODAY, DEADLINE imposed on the release of ALL HOSTAGES. The United States will back the decision they make!”

“US will be 'flooded with jobs' as foreign nations avoid tariffs,

“Interest Rates should be lowered, something which would go hand in hand with upcoming Tariffs!!! Let's Rock and Roll, America!!!”

“BIDEN INFLATION UP!”

“US will be 'flooded with jobs' as foreign nations (will set up manufacturing bases in the US) to avoid tariffs”

Conclusions:

The Jan’25 surge in core and total CPI is in line with past trends and more of a transient seasonal rather than a structural issue. The Fed does not make any important policy decision based on a single month's economic data. Fed considers at least a 3M rolling average (3MRA) of core inflation and unemployment data for any policy decision.

Although the Fed generally talks about 2.0% PCE inflation as a price stability target, in reality, it maintains 1.5% core/total PCE inflation and 2.3% core/total CPI inflation; i.e. around 1.9% average inflation (PCE+CPI) targets, Congress has entrusted along with maximum employment 96.0-95.5% of the labor force; i.e. 4.0-3.5% headline unemployment rate. Fed will now try to bring down average core inflation from around 3.0% to 2.5% by keeping the unemployment rate at least around 4.0% by December’25 and then 2.0% core inflation and 3.5% unemployment rate by December’26 to achieve its mandate of maximum employment and price stability.

As US core inflation almost stalled in Q4CY24 at around +3.1% on average, while the unemployment rate remains stable at around 4.1% along with resilient Real GDP and PDPF growths around 2.8-3.0% on average, the Fed should have paused in December to asses more data and Trump policies on inflation and employment. But the Fed cut 25 bps in Dec’24 too (after September and November) to make up for previous policy mistakes and be able to be ahead of the curve despite core disinflation almost stalled in H2CY24, while the unemployment rate remains stable around 4.0% and economic activity remains resilient.

Despite unfavorable data, and Trump policy uncertainty Fed cut on 18th December’24 to catch up with synchronized global easing and also to keep differential with ECB, which cut -100 bps in 2024. Fed may have also made a policy mistake by not cutting rates by 50 bps in H1CY24 and thus cut an additional 50 bps in H2CY24 to catch up. 

In H1CY25, the Fed may also share some concrete plans to end the QT, which may be positive for UST and negative for US bond yields, USD. Fed is now cutting rates while doing QT, which is two contra monetary policy tools. As a result, bond yields remain elevated at around 4.50% and the real economy may not be getting the full effect of a 100 bps rate cut in 2024. The market usually discounts Fed rate cuts well in advance in line with regular Fed talks and official dot plots.

Thus Fed may close the QT first by June’25 at B/S size around $6.60-6.50T from present levels of around $6.89T. Fed may keep the B/S size around 22% of projected nominal GDP around $30T by 2025, which may be an ideal level for the Goldilocks nature of the US economy and may not cause another REPO/Funding market crisis as we have seen late 2019 under Trump and Powell-1.0.

Fed may first close QT by June’25 and then resume the rate cut cycle for 50 bps cumulative in 2025. Fed may provide a definitive plan to end the QT in its March’25 meeting and close the same by June’25 and cut rates by 25 bps each in June and Dec’25.

Market impact:

On Friday, Wall Street Futures, Gold surged initially after softer than expected US retail sales and Trump tariffs delay, but soon stumbled on finer details of retail sales, seasonal trends, and positive revisions for Dec’24, less dovish Fed and Trump talks. Broader SPX-500 closed almost flat, while tech-heavy NQ-100 gained +0.38% and blue chip (China-heavy MNCs) DJ-30 lost -0.38%. Overall, Wall Street closed in the green on the Trump tariffs deal and progress of the Gaza and Ukraine war permanent ceasefire, while dragged by hotter-than-expected US core inflation data, mixed retail sales, and less dovish Fed/Powell talks.

On Friday Wall Street was boosted by techs, communication services, banks & financials, and energy (higher oil due to the US threat to curb Iran exports and a Pentagon report about a potential Iran nuclear facilities attack by Israel, which may be also supported by the US). Wall Street was dragged by consumer staples, healthcare, utilities, real estate, materials, industrials and consumer discretionary.

On Friday, Dow Jones (DJ-30) was boosted by Goldman Sachs, NVIDIA, Amazon, Apple, IBM, Chevron, Cisco, Walt Disney, and 3M, while dragged by P&G, United Health, Travelers, Amgen, Salesforce, Home Depot, Honeywell, Microsoft, McDonald’s, Merck, J&J, Boeing, Walmart and Caterpillar. In the broader market (SPX 500), Airbnb surged on upbeat earnings, and GameStop surged on bitcoin speculation. Moderna reversed after a wider-than-expected loss, while Eli Lilly dropped. On the week, the S&P added 1%, the Dow gained 0.3% and the Nasdaq jumped 1.7%.

Weekly-Technical trading levels: DJ-30, NQ-100, Dax-40 and Gold

Looking ahead, whatever the fundamental narrative, technically Dow Future (CMP: 44650) now has to sustain over 45300-45500 any further rally; otherwise sustaining below 45200, DJ-30 may again fall to 44500/44100-43700/43300 and 42800/41900 and further 41200/40600-40400/40000 in the coming days.

Similarly, NQ-100 Future (21900) has to sustain over 22200-22300 for a further rally to 22500/22700-23000/23300 in the coming days; otherwise, sustaining below 22100, NQ-100 may again fall to 21700/21300-21100/20700 and further 20500/20300-20100/19250 in the coming days.

Technically, Germany’s Dax-40 now has to sustain over 23000 for a further rally; otherwise sustaining below 22900-22700, may again fall to 21800-21200 in the coming days.

Also, technically Gold (CMP: 2900) has to sustain over 2850 for a further rally to 2875/2895-2905/2930 and 2950/2975-3000/3025; otherwise sustaining below 2840-2825 may again fall to 2770/2755-2725/2690 and further 2675/2655-2610/2560 in the coming days.