US dollar jumps as Fed officials highlight higher neutral rate, sticky CPI

The US dollar is busting through some resistance levels.

The euro is at the lowest in a year, helped by German 2024 GDP forecasts being dragged into negative territory with fiscal hawks likely to take over the government in February.

What’s the catalyst on the move?

It’s not clear as Treasury yields are down at the front end today and flat at the long end. The CPI report had some kinks and one of them is rent inflation, something RBC highlighted.

“Two-thirds of year-over-year
core price growth is still coming from the bulky home rent components, and
growth in those will fade as slower growth in market rent prices flows
through to CPI growth with a lag as leases are renewed…. Still, by our count, the
breadth of inflation pressures across non-shelter components also widened.
By our count, the share of the CPI basket excluding shelter with price
growth above a 3% annualized rate over the last three months rose to just
under 50% in October. That is still well-below levels closer to 90% in
2022, but up from below 30% over the summer. “

As for rent inflation, there is some worry about new market rents holding up. Here is a line from Fitch today (via ZeroHedge):

“It looks like most forecasters (including the Fed) have got it wrong on rental inflation, which just refuses to fall.”

Now I think RBC has the right take here due to the lags and that’s how RBC sees it as well.

Given the growth enthusiasm right now, a Fed pause is inevitable. December pricing is at 15% for no change and these things tend to happen faster than people expect.

That said, I think the path forward is another cut in December and then a pause that could last throughout Q1 and longer if the data continues to hold up.

We also got comments from Kashkari and Logan today and there was a theme of optimism about growth. Kashkari also spoke yesterday when he highlighted the potential for a higher neutral rate. That was something Logan touched on as well in saying that models show they could be close to neutral now.

She said the Fed will ‘most likely’ need more cuts but should ‘proceed cautiously’, which isn’t exactly a signal on a big rate cutting cycle. Contrast with Europe, which needs help.

This article was written by Adam Button at www.forexlive.com.