On the eve of the release of significant inflation data, Wall Street predicts that the December CPI may return to the 3% range for the first time in five months. The Federal Reserve is unlikely to cut interest rates this year and may even raise them?
Currently, the market generally expects that the CPI data for December may further deteriorate, with the overall CPI possibly rising from 2.7% to 3.0%, and the core CPI possibly rising from 3.3% to 3.4%.
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Major Wall Street investment banks such as Nomura and Bank of America believe that the Federal Reserve is &#34;unlikely to cut rates this year.&#34; Nomura stated that the Federal Reserve will only cut rates by 25 basis points in March and then enter a long pause. However, considering stronger-than-expected inflation data in the second half of 2024 and potential tariff risks, there is even a possibility of no rate cuts throughout the year.
Economist Jason Schenker also mentioned in a column that the market generally expects only two 25 basis point rate cuts in 2025, but if the December CPI accelerates year-on-year, the number of rate cuts by the Federal Reserve this year may be less than expected, or even no cuts at all.
Bank of America stated in its latest research report that if the year-on-year growth rate of core PCE exceeds 3% or long-term inflation expectations become uncontrollable, the Federal Reserve may reconsider raising rates.
Nevertheless, Citigroup analysts pointed out that if inflation data is lower than expected, the Federal Reserve may implement more rate cuts than the current market pricing expectations. The bank expects the Federal Reserve to cut rates by 125 basis points in 2025, mainly based on further weakness in the labor market.
<h2>Will the Federal Reserve have no rate cuts throughout the year, or even raise rates?</h2>
On the 9th, Nomura analyst Aichi Amemiya predicted in a research report that the month-on-month growth rate of core CPI in December is expected to decline from 0.308% in November to 0.271%, marking the fifth consecutive month that core CPI exceeds a growth rate of 0.25%. Specifically:
<blockquote>
<ul>
<li>Core CPI: The month-on-month growth rate for December is expected to be 0.271%, lower than November's 0.308%, with a year-on-year growth rate of 3.295%.</li>
<li>Core PCE: The month-on-month growth rate for December is expected to be 0.242%, higher than November's 0.115%.</li>
<li>New car prices: Expected to rise by 0.7% month-on-month. Clothing prices are expected to rise by 0.3%.</li>
<li>Regular rent and Owners' Equivalent Rent (OER): Expected to rise by 0.29% and 0.37% month-on-month, respectively.</li>
</ul>
</blockquote>
Nomura pointed out that although the price growth of some highly volatile categories (such as dining out and used cars) has slowed, the increases in rent, new cars, and airline ticket prices are expected to partially offset this easing.
Nomura expects that the Federal Reserve will only cut rates by 25 basis points in March this year and then enter a long pause. However, considering stronger-than-expected inflation data in the second half of 2024 and potential tariff risks, there is even a possibility of no rate cuts throughout the year.
Bank of America analyst Stephen Juneau predicted in a report on the 13th:
<blockquote>
<ul>
<li>Core CPI: Expected to grow by 0.3% month-on-month in December, with a year-on-year growth rate remaining at 3.3%.</li>
<li>Overall CPI: Expected to grow by 0.3% month-on-month, with a year-on-year growth rate of 2.8%.</li>
</ul>
</blockquote>
Bank of America believes that changes in trade, fiscal, and immigration policies may lead to a stagnation in inflation progress by 2025. If new tariff policies are implemented, commodity prices may face further upward risks.
Bank of America no longer expects the Federal Reserve to cut interest rates further. This is because the inflation rate is still above the target, the risks are skewed to the upside, economic activity is strong, and the labor market currently seems to have stabilized. Bank of America's baseline forecast is that the Federal Reserve will extend the period of rate hikes, but there is a possibility of rate increases:
<blockquote>
“We believe that if the core PCE inflation rate exceeds 3% year-on-year and long-term inflation expectations become unstable, the Federal Reserve will raise interest rates.”
</blockquote>
Barclays analyst Pooja Sriram stated that the Trump tariff policy is expected to be implemented in the second half of 2025, potentially pushing CPI inflation up by 35-40 basis points within 12 months.
<h2>Citigroup: The possibility of softening inflation cannot be ignored, expects the Federal Reserve to cut rates by 125 basis points this year</h2>
Citigroup analyst Veronica Clark expects the U.S. core CPI to grow by 0.23% month-on-month in December, with commodity and housing prices being the main uncertainties for December.
New car prices are expected to rise by 0.4%, possibly driven by recent hurricane demand and expectations of the upcoming expiration of electric vehicle tax credits. Used car prices are expected to rise slightly by 0.2%, while furniture prices are expected to decline by 0.2% month-on-month. Major rents are expected to rise by 0.26% month-on-month, and owners' equivalent rent is expected to rise by 0.31%, both slightly accelerating compared to November.
<blockquote>
“Prices for various services continue to fluctuate, but overall, as the labor market loosens and wage pressures ease, prices should moderate.”
</blockquote>
Citigroup stated that if the core CPI data in December is unexpectedly strong, it may push up U.S. Treasury yields. However, market expectations for Federal Reserve rate cuts have significantly decreased. If inflation data unexpectedly softens, the downside risk for short-term interest rates may be greater.
Nevertheless, Citigroup believes that the market may be overly focused on the risks of rising inflation while ignoring the potential for inflation to soften further. If inflation data comes in below expectations, the Federal Reserve may implement more rate cuts than currently priced in by the market. It is expected that the Federal Reserve will cut rates by 125 basis points in 2025, primarily based on further weakness in the labor market.
<h2>A &#34;Night of Terror&#34; for U.S. Stocks?</h2>
Stuart Kaiser, head of U.S. equity trading strategy at Citigroup, analyzed that the S&amp;P 500 index is expected to experience a 1% fluctuation after the CPI data is released, which is the largest implied volatility for the index on the day of CPI data release since the regional bank crisis in the U.S. in March 2023
This implied volatility level is comparable to the upcoming Federal Reserve interest rate decision (January 29) and has already surpassed the next non-farm payroll date (February 7).
Against the backdrop of rising inflation concerns and ongoing uncertainty regarding Federal Reserve actions, the U.S. volatility index VIX has risen to nearly 20, indicating strong market anxiety.
JP Morgan believes that the most likely scenario is that the December core CPI will grow month-on-month between 0.17% and 0.23%, driving the S&amp;P 500 index up by 0.3% to 1%. Additionally, if the month-on-month increase is below 0.1%, the S&amp;P 500 index could surge by 1.8% to 2.5%.
Brent Kochuba, founder of the options platform SpotGamma, stated:
<blockquote>
“Given the current high volatility, if the CPI data comes in below expectations, the S&amp;P could quickly rebound above 5900 points. However, if the CPI data exceeds expectations, the decline of the S&amp;P 500 index may accelerate, and the VIX index will also rise significantly.”
</blockquote>

Wall Street predicts that the U.S. December CPI may rise to 3.0%, returning to the 3% range for the first time in 5 months, while core CPI may increase from 3.3% to 3.4%. The market has lowered expectations for the Federal Reserve to cut interest rates this year, and Bank of America stated that if long-term inflation expectations become uncontrollable, the Federal Reserve may even consider raising interest rates

- Wall Street anticipates that December's CPI may rise to 3.0%, ending a five-month trend below this threshold, with the Fed unlikely to cut rates this year.  
- Major banks like Nomura and Bank of America predict minimal rate cuts, citing potential inflation risks and economic stability, while Citigroup suggests more cuts if inflation data falls short of expectations.  
- Market volatility is expected around the CPI release, with the S&P 500 projected to fluctuate significantly based on the CPI results, reflecting heightened investor concern.

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Inflation is making a comeback! Tonight, the U.S. CPI may return to the 3-digit range, and the expectation of interest rate cuts this year is "cooling off"?