U.S. inflation data released today will likely do little to change the trend in the equity and bond markets, at least in the short-term. U.S. core CPI was slightly cooler than expected on both a month-over-month (MoM) basis, up +0.2% versus +0.3%, and year-over-year (YoY), up +2.6 versus +2.7%. Headline CPI was consistent with expectations, up +0.3% MoM and +2.7% YoY.
Headline inflation was driven by an increase in food prices, as food at home and food away from home were both up +0.7% MoM. This was offset by energy prices, which were in line with the broader measure, up +0.3%; gasoline prices were lower by -0.5% in December. Driving core CPI were shelter prices, up +0.4% – a reversal in trend from October’s reading of +0.2% – along with a sharp increase in recreation services of +1.8%. Conversely, notable softness in used cars and trucks (-1.1%), appliances (-4.3%), and motor vehicle repair (-1.3%) contributed to the lighter reading.
A softer CPI print is supportive of additional Fed rate cuts, but today’s release did little to change expectations for January’s upcoming meeting – particularly given questions about seasonality and data quality. Indeed, the release is likely to be overshadowed in terms of market sentiment by other events unfolding in Washington D.C. The Department of Justice’s decision to serve the Fed with subpoenas related to a potential indictment involving false testimony around construction overruns at the Fed’s headquarters provoked Fed Chair Jerome Powell to respond strongly on behalf of Fed independence, stating “this is about whether the Fed will be able to continue to set interest rates based on evidence and economic conditions – or whether instead monetary policy will be directed by political pressure or intimidation.” The condemnation from global central bankers, including former Fed Chairs, and a bipartisan cohort of lawmakers indicates that there may be an opportunity for a detour at some point in the future. For now, however, concerns are likely to remain and could create volatility, particularly in the Treasury market.
In addition to the DOJ’s action, President Donald Trump announced his desire to cap credit card interest rates at 10% for a year, beginning on January 20th. While it does not appear that the President can implement this cap unilaterally since it would require Congressional action, the announcement evoked strong reactions from banks. With only the most super-prime credit cards economically attractive at that rate, the move would likely result in lower credit availability for many households, offsetting the benefit of the lower carrying costs in terms of grappling with the affordability challenge.
In short, the start of 2026 has been nothing if not eventful. While the economy remains in solid condition in our view, policy changes and ongoing geopolitical tensions, set against the backdrop of a U.S. midterm election year, could upset short-term momentum. We remain focused on the opportunities represented by stronger earnings growth, limited credit stress coupled with attractive yields, and an acceleration of M&A and in turn private market activity – all of which we believe can still materialize even against a more uncertain backdrop.
