To The Moon

In October 2024, the U.S. Consumer Price Index (CPI) rose by 2.6% year-over-year, up slightly from September’s rate of 2.4%. This uptick reflects rising inflation, marking the first increase since early 2024, largely due to shelter costs, which rose by 4.9% and contributed significantly to the monthly CPI. Core CPI, which excludes volatile food and energy prices, held steady at 3.3% annually. Monthly inflation rose by 0.2%, in line with recent trends.

Food prices saw a 2.1% increase year-over-year, with food away from home climbing 3.8%. Energy prices, however, declined by 4.9% year-over-year, largely due to drops in fuel oil and gasoline prices, which fell by 20.8% and 12.2%, respectively. This deceleration in energy costs helped moderate the overall inflation rate despite the rising shelter and food costs.

Expectation Meet?

With the October CPI numbers meeting expectations, showing only modest growth in prices, analysts are contemplating whether the Federal Reserve will still consider another 25-basis-point rate hike in December. The annual inflation rate for October slowed to around 3.3% from 3.7% in September, and the core CPI held steady at 4.1%, suggesting a gradual but persistent inflationary pressure that may support further tightening by the Fed if deemed necessary.

Fed Chair Jerome Powell has previously emphasized that while inflation has declined, achieving the 2% target will require time and potentially additional policy adjustments. However, economic resilience and recent labor market strength may add weight to arguments for a December rate increase, even with this slight cooling in inflation. Analysts remain divided, with some expecting the Fed to hold steady if upcoming data, such as November’s inflation report, also points to a continued downtrend in prices.

Inflation concerns

In November 2024, inflation concerns continued to influence the $.SPX(.SPX)$ , with the index exhibiting volatility tied to evolving expectations around Federal Reserve policy. Despite a recent Fed rate cut, investors remain sensitive to inflation trends and bond market shifts. As the month progresses, market analysts expect potential growth spurred by year-end factors like a "Santa Claus rally," where seasonal buying often bolsters stock prices. Nevertheless, underlying inflationary pressures and potential Fed actions in December keep market sentiment cautious, with support expected around the 5700 level if volatility arises.

Fed rate cut Opportunity For Bonds $iShares 20+ Year Treasury Bond ETF(TLT)$

A Fed rate cut typically leads to lower yields, which makes long-term bonds more attractive. This can drive up the price of long-duration bond ETFs like $iShares 20+ Year Treasury Bond ETF(TLT)$ . As rates decrease, TLT’s price tends to rise due to the inverse relationship between bond prices and yields. However, investor sentiment and inflation expectations also play critical roles in determining bond market behavior after a rate cut.

Bond investment

For bond investors, strategic positioning along the yield curve may be crucial. An emphasis on intermediate-term bonds can offer a balance, capturing yield benefits without the heightened volatility risk of longer maturities. There’s also a shift towards income strategies in response to lower expected returns from Treasuries; portfolios incorporating municipal bonds, investment-grade corporate bonds, and even certain emerging market debts may diversify risk and stabilize returns, particularly as the Fed navigates rate adjustments and a possible economic soft landing.

The Fed’s anticipated rate cuts signal a mixed impact for bond investors, as yields on shorter-term bonds are expected to decrease, potentially stabilizing or increasing bond prices.

Feb Rate Cut Outlook

As of November 2024, the Federal Reserve’s recent interest rate cuts have opened the door to further easing in early 2025, with a potential rate cut in February. Following two consecutive reductions (September and November 2024) totaling 75 basis points, inflation has eased to closer to the Fed’s 2% target, and projections suggest an ongoing economic moderation. However, with persistent concerns over economic momentum and higher long-term Treasury yields, the Fed may prioritize additional cuts to support growth. Economists largely anticipate a 25-basis-point cut as early as February if data on inflation, employment, and GDP growth remain supportive.

Market consensus aligns with expectations for a gradual reduction in rates, with cuts forecasted into mid-2025 if inflation stays in check. The upcoming December Fed meeting and economic data releases will be closely monitored to gauge if the path to a February cut solidifies.

Conclusion

As inflation has moderated but remains above the Fed’s 2% target, a rate cut would likely suggest that economic activity and demand are cooling enough for the Fed to prioritize growth and stability. In this context, market observers are monitoring several indicators, such as employment data and consumer spending, which still show resilience but could be pressured if further economic slowdowns occur.

The bond market has already shown signs of reacting cautiously. Typically, bond prices rise as rates fall; however, given the recent tightening cycle, some analysts see limits to these gains. Longer-term yields may not decline significantly if inflation risks and federal debt levels remain high, as these factors could push yields upward even in a loosening monetary environment.

For equity markets, especially the S&P 500, any Fed shift could provide temporary relief. However, if a rate cut is accompanied by deteriorating growth indicators, it could lead to increased volatility as investors reassess growth and earnings expectations. In summary, while a rate cut could ease financial conditions, it may also underscore economic vulnerabilities that require careful monitoring by investors.