The U.S. inflation rate fell more than expected in December, prompting the Federal Reserve to signal a potential cut in interest rates. According to a research report released by Huatai Securities, U.S. growth in the fourth quarter was significantly weaker than in the third quarter, with Christmas holiday consumption data proving to be overall weak. The report also stated that real estate showed slight improvement due to the fall in mortgage interest rates, but it remains at a low level.
The Federal Reserve’s shift in December led to increased expectations for an interest rate cut, with market implied timing for the first rate cut being advanced to March. Huatai Securities predicts that the overall expectation for a full-year interest rate cut in 2024 has increased by 45 basis points to 156 basis points.
The Goldman Sachs Financial Conditions Index has eased by 48 basis points since December, reaching its loosest level since 2023. This significant loosening of financial conditions has been attributed to factors such as a rise in the stock market, a fall in U.S. bond interest rates, and a weaker U.S. dollar.
In terms of inflation, core PCE inflation in November was lower than expected, and medium and long-term inflation expectations have dropped significantly. This is further compounded by data showing that U.S. CPI and core CPI rebounded slightly in November, but the rebound may not be sustainable.
Additionally, the research report highlights that the U.S. labor market continues to cool, with job vacancies falling more than expected and the unemployment rate potentially rising in the future.
Overall, Huatai Securities has flagged the slowdown in U.S. growth as a major risk factor, particularly as global geopolitical risks continue to escalate. As such, the market is advised to closely monitor new non-farm employment and inflation trends in December for further insights into the state of the U.S. economy.