Yesterday’s US CPI data provided markets with some relief, as it kept alive the idea that disinflation is still in progress. Although headline inflation rose in line with expectations to 2.9% y/y, core inflation unexpectedly declined to 3.2% y/y in December. Combined with favourable PPI data, it indicates that the core PCE deflator, which is the Fed’s preferred inflation measure, may align with the 2% target.

On the whole, the data reinforced expectations for 50bps of Fed rate cuts this year, as signalled by the most recent dot plot. Notably, pricing in the overnight indexed swaps (OIS) market changed from reflecting around 29bps of rate-cut risk through December to 36bps after the CPI print. In turn, this offered relief to the US bond market after a recent selloff, and supported market risk appetite more broadly.

For South African markets, a deeper Fed easing cycle would allow the SARB more space to cut rates, too. Traders have increased their expectations for interest rate cuts in South Africa after the US CPI data, with forward rate agreements (FRAs) now pricing in only a single 36bps of rate-cut risk this year. SARB Governor Lesetja Kganyago has been emphasising a prudent approach to monetary policy, cautioning against moves that could later prove regrettable.