CONSUMER CYCLICALS: Consumer & Transport: Week in Review

Dovish BoE repricing extends further in the wake of the U.S. CPI data. 

• BoE-dated OIS shows 57.5bp of cuts through year-end, over 20bp more dovish on the day.
• Markets near enough fully discount the next 25bp cut come the end of the March meeting, with 36bp of easing priced through May. We continue to look for cuts in February and May at this stage.
• SONIA futures now 3.0-20.0 higher on the day, building on the recovery from yesterday’s cycle lows in many contracts.
• Comments from BoE dovish dissenter Taylor eyed (16:30).
• Participants will be attuned to any comments pertaining to recent hawkish market adjustments (although a fair amount of those moves have been unwound today) and this morning’s softer-than-expected CPI reading (which was largely driven by volatile components).

• In trend terms, the three-month core CPI run rate eased four tenths to 3.3% annualized (lowest since Sept) but the six-month run rate accelerated three tenths to 3.2% (highest since June).
• The Y/Y rate meanwhile inched lower from 3.32% to 3.24% Y/Y (exaggerating what looks like a miss on the 3.3% expected), with the six-month rate running just 5bps lower in a sign of recent stickiness. The six-month rate has been running below the Y/Y since July and in October was as much at 76bps softer.
• As for core PCE implications, having been revised a few bps above the ~0.20% M/M seen prior to yesterday’s PPI, we’re now more likely at estimates in the mid to high teens for December (Cleveland Fed tracking 0.19%). We’ll revert as more updated estimates come through.
• All told, it’s a moderately more dovish report than expected against a firmly hawkish market backdrop (helping explain the magnitude of the reaction with 2Y Tsy yields ~9bps lower post release), but one that in trend terms continues to warrant near term Fed caution. 

• Headline CPI was close to expectations in December, rising 0.39% M/M (sa, cons 0.4) and 2.89% Y/Y (cons 2.9%) with energy unsurprisingly providing a strong driver with a 2.6% M/M increase.
• Core CPI meanwhile was on the soft side of expectations, at 0.225% M/M (vs unrounded analyst estimates we’d seen averaging 0.25%, range 0.22-0.29) after four months oscillating between 0.28-0.31% M/M.
• Key rental series were roughly in line on balance, accelerating after a surprisingly soft November. At 0.31% M/M, the weighted average of OER and primary rents lifted from 0.23%, the first print since Apr 2021 that was softer than the 0.27/0.28% averaged pre-pandemic (it briefly drew level with that pace back in June). It does however keep rental inflation on a rough, and long-awaited, disinflationary path.
• Away from rents, ‘supercore’ CPI was at the low end of expectations at 0.205% M/M after four months averaging 0.35% M/M.
• Core goods disinflation was arguably more notable though, reverting to just 0.05% M/M after the 0.31% M/M in November had been its strongest monthly increase since May 2023. It came despite used vehicles prices rising a stronger than expected 1.2%. 

• As for the surprises across the main single items behind core CPI, it’s notable to us that there were very few large category misses skewing the modest softness on the month, with lodging the largest (-0.95% M/M vs limited estimates between 0.1-1.5%).