Michelle Cluver
Global X ETF Model Portfolio TeamStrong economic data and slowing inflation, what more could the market want? December’s Core CPI reading was encouraging for markets, coming in slightly below market expectations at 0.2% m/m and 3.2% y/y. Headline CPI continued higher to 2.9%, pushed up by energy prices.
Following Friday’s hot labor market data, this is a particularly reassuring reading and takes some of the pressure off yields. After touching 4.8% intraday on January 14th, the 10-year Treasury yield has pulled back sharply to 4.65%.1 While the Federal Reserve (Fed) is expected to be cautious in the next phase of their rate cutting cycle, this reading reflects that they may still be on track to reduce interest rates in 2025.
Improving inflation data and a strong economy is a goldilocks situation. The only way to improve this situation is to add strong earnings growth. Banks provided a strong start to Q4 earnings season, offering an encouraging early indication of economic strength flowing through to earnings. From a portfolio management perspective, we’re monitoring earnings strength as we assess market breadth. As earnings improve beyond mega-cap tech and expand further down the market cap spectrum, we’re likely to see improvements in market breadth.
The charts below outline how headline CPI rose for the third consecutive month, with energy being the key component driving m/m growth. Despite the increase in headline inflation, core inflation y/y improved from 3.3% to 3.2%, coming in slightly below estimates. It is also encouraging that supercore CPI continues to reflect an encouraging trend. This reading strips out the impact of shelter costs.
