A further decline in the CPI to 7.1% on December 13 was supported by an expected rally in stocks and a fall in the US dollar and Treasury yields. On December 14, Powell raised interest rates by 50 bps to a new federal funds rate of 4.25%-4.5%.
Headline inflation slowed to 7.1% from 7.7%, offset by a 0.5% drop in commodity prices and a 1.6% drop in energy prices.
Core inflation continued to fall to just under 4%, down from a peak of over 12% in February. However, services inflation, excluding energy, rose to 6.8%. Services inflation will remain high as the US labor market remains flexible. however, that may change in 2023.
Powell remains a hawk
The Fed raised interest rates by an expected 50bps to set a target for new fed funds at 4.25%-4.5%, with Powell’s tone remaining unchanged with “continued” rate hikes and “we will continue until the end of the job.” Powell expects inflation to continue to ease slowly as the labor market remains tight. 55% of core CPI is still rising fast, even though house and commodity prices are falling rapidly.
The market continues to grapple with the Fed and disagreements on federal funds rate futures. The market is forecasting a fed funds rate peak of 4.8% in May 2023 before falling to 4.5% in December 2023.
According to the DOT plot, which shows forecasts for the federal funds rate, each point represents the view of a Fed policymaker. The Fed has a higher-than-market projected funds rate through the end of 2023, revised from 4.6% to 5.1%; Seven Fed officials forecast a rate above 5.1% and ten above 5%.
Other notable rate hikes
The Bank of England raised interest rates by 50 bps on December 15, raising the bank rate to 3.5%. This was the ninth consecutive rate hike by the BOE. In addition, inflation may have peaked in the UK as inflation expectations beat market estimates as inflation fell to 10.7% from 11.1% and the headline reading fell to 6.5% from 6.5%. ,3%.
In addition, the ECB raised interest rates from 1.5% to 2% and announced its balance sheet reduction plan.
Review of assets. week of December 12
From December 12th to December 15th, BTC was the best performing asset against its peers, however, BTC and ETH hit new lows for the week on December 16th.
- BTC: -1.85%
- ETH: -5.60%
- Gold: -0.33%
- DXY: -0.39%
- SPX: -2.0%
- Nasdaq: -2.76%