Inflation data is the main focus for today and it don’t come any bigger than one before the Fed meets. That especially with questions surrounding a potential need to pause for the central bank.
All that being said, it’s a tall order to shift the prevailing market pricing in that direction. Traders are seeing a ~85% probability of a 25 bps rate cut for next week. So, it will take a serious beat on the inflation estimates today to really retrace those odds.
And judging by analyst estimates, the propensity for the data to surprise significantly isn’t that high. Core annual inflation is estimated to come in at 3.3% for November. However, the range of estimates are only between 3.2% to 3.4%. So, that speaks to the lack of potential for the data to surprise.
Even with a slightly higher reading, it reaffirms that the disinflation path is not without some bumps along the way. The pace is definitely stalling but as we’ve known since the start of the year, the real challenge isn’t getting inflation down from 6% to 3%. It was always about getting inflation down from 3% to 2% in a sustainable manner. And that’s where we’re at.
Barring any major surprises, I don’t see this as being one to really alter the Fed odds and outlook going into next week. It is also the Fed’s final chance of sneaking in one more rate cut before Trump takes over and/or if they are pressed further on the economy slowing. As such, the market reaction after the data might not be as interesting or sizeable given the circumstances.
Then again, keep in mind that this wouldn’t be the first time that traders choose to run the other way just one week before the FOMC meeting. That’s a tail risk to be mindful about when looking into the post-CPI reaction in the day(s) ahead.