If US CPI for November is materially different from expectations, it has the potential to dull or amplify the impact of this week's FOMC meeting outcome on markets. UBS Economics expect a 0.25% m/m increase in the headline CPI on weaker gasoline prices (consensus: 0.3%, last: 0.4%) and an on-consensus 0.31% m/m increase in core (last: 0.3%).
A lower-than-expected core print would benefit duration-sensitive assets including Growth equities, as well as encouraging USD downside as a first pass reaction that caps the terminal Fed funds below 5% into year end. More specifically, a step-down in core services prices excluding energy and shelter would put more emphasis on investor expectations for growth and inflation next year relative to FOMC's inflation projections and dot plots - a risk-friendly outcome.
By contrast, a higher-than-expected core print would put greater weight on the Fed's expected higher-for-longer message that accompanies a 50bp hike and is unlikely to reveal a step-down to a 25bp hiking pace for its subsequent meeting.
- UBS Strategy
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