US Treasury yields fell on strong inflation data. Stock markets surged, oil rose on demand and inventory dips, gold edged up amid inflation concerns, while Bitcoin soared 9.90%, and the dollar weakened.

US Treasury yields declined during the week, driven by better-than-expected inflation data. The US yield curve has remained positive for over a month, with the spread between the 10-year and 3-month Treasury yields widening sharply over the past 15 months before recently turning positive. Historically, a sharp positive shift in the yield curve has often signalled an impending recession. The curve is now returning to a more typical shape.

US stock markets ended the week on a strong note. Small-cap and micro-cap stocks surged by 3.98% and 3.20%, respectively, while large-cap stocks gained 2.92%. The "Magnificent 7" group rose 1.95%. Investors reacted positively to the inflation data, fuelling expectations of an interest rate cut in spring 2025 (June) and a 50% likelihood of another cut by year-end.

The US dollar weakened against the euro, dropping to 0.9708. WTI prices climbed nearly 2%, supported by a robust demand outlook in the US, the world’s largest oil consumer, and an inventory dip of 2 million barrels for the second week of the year. Reports of a potential ceasefire between Israel and Hamas tempered the price increase. Gold prices rose by 0.83%, reflecting persistent concerns about inflation and expectations that it will remain elevated. Meanwhile, Bitcoin rallied significantly, surging 9.90% over the week.

U.S. inflation eased in December, retail sales rose, and the housing market showed growth, with a cautious outlook for 2025 due to elevated rates.

In December 2024, U.S. inflation moderated, with headline CPI steady at 2.9% YoY and core CPI easing to 3.2%. Slower housing and service cost increases offset rising energy and transportation prices, hinting at stabilization. Despite this, elevated inflation and core CPI above the Fed’s 2% target suggest rate cuts may begin in June. Retail sales grew 0.4%, up 3.9% annually, driven by seasonal demand despite inflationary pressures. The housing market saw robust multifamily growth and modest single-family gains, with builders optimistic but constrained by high mortgage rates and tight inventories. Pro-consumer policies and potential rate cuts in 2025 could support gradual economic recovery.

US inflation moderated in December, with core CPI easing slightly. Despite improvements, elevated inflation and persistent pressures suggest the Fed will delay rate cuts beyond March.

U.S. inflation showed signs of moderation in December, with the headline CPI holding steady at 2.9% YoY, in line with expectations. Core CPI eased slightly to 3.2%, down from 3.3% in November, defying predictions of no change. Monthly, headline CPI rose by 0.4%, while core CPI increased by 0.2%, marking an improvement compared to the previous four months, each of which saw a 0.3% monthly rise.

December's inflation was primarily driven by a 2.6% MoM increase in energy prices, largely due to a 4.4% rise in gasoline prices. Additionally, there were temporary price hikes in vehicles and airline fares, which increased by 0.5%, 1.2%, and 3.9%, respectively. These increases were likely driven by short-term demand, fuelled by hurricanes and seasonal holiday travel. Housing costs grew moderately, with rents rising by 0.3% MoM, consistent with long-term trends. Service prices decelerated to 4.4% from 4.6% in the previous month, driven by a slower increase in housing costs (4.6% vs. 4.7% in Nov). However, transportation service costs accelerated, rising to 7.3% from 7.1%.

Softer inflation, coupled with slower-than-expected wage growth (0.7% vs. 1% previously), provides some market relief. However, inflation remains elevated, and with core inflation still above target, the Fed is expected to extend its pause on rate cuts beyond March, closely monitoring economic and inflation trends.

The market now expects around 40 bps of rate cuts this year, with the first anticipated in June and a 50% chance of another later in the year. The Fed's cautious stance is driven by persistent inflation, as core CPI remains above the 0.17% monthly target needed for 2% annual inflation. Although housing costs have eased, rising vehicle and energy prices continue to fuel inflation. The strength of the dollar, coupled with higher Treasury yields, is expected to ease inflationary pressures, providing the Fed with greater flexibility to lower interest rates in the H2 2025.

As we have noted on previous occasions, we expect inflation to rise slightly as a result of Trump’s policies. However, being slightly less optimistic than the market, we anticipate a single interest rate cut in the second half of the year.

US retail sales in December 2024 grew by 0.4%, driven by seasonal factors and holiday sales, with year-over-year growth of 3.9% despite inflationary pressures.

US retail sales in December 2024 rose by 0.4%, reaching $729.2 billion, marking a slowdown from the 0.8% increase in November and falling short of the 0.6% market expectation. Year-over-year, sales grew by 3.9% compared to December 2023, reflecting a solid year-end performance with 3.8% total growth and 4.2% growth in core retail. This growth was largely influenced by seasonal distortions, including a late Thanksgiving, an additional weekend in December, and the general sales boost from the Christmas season. Notable declines were observed in building materials and food services, while auto sales increased by 0.7%, supported by lower interest rates and manufacturer incentives. Gasoline receipts also rose due to higher pump prices. The Control Group, which feeds into GDP calculations, outperformed expectations with a 0.7% MoM gain. When adjusted for inflation, real retail sales rose by approximately 1.0% YoY, indicating continued consumer spending despite inflationary pressures.

We expect retail sales to continue increasing but at a modest pace. Trump's policies have contributed to driving consumer spending.

Housing starts and permits exceeded expectations in 2024, driven by multifamily growth. Single-family starts rose modestly, while builders remain optimistic despite elevated mortgage rates and ongoing underbuilding challenges.

Housing starts and permits have surpassed expectations, signaling a significant boost in builder confidence. In 2024, single-family home starts averaged their highest level since 2007, excluding 2021. Housing starts surged to an annualized rate of 1.499 million units, marking a 15.8% monthly increase. Much of this growth was fueled by a 33.2% jump in the volatile multifamily sector. Single-family starts rose by 3.3% from the previous month, though they are still 2.6% lower than the same time last year. Meanwhile, housing permits, a key indicator of future activity, reached 1.483 million, a 1.4% increase from the prior month. Single-family permits rose by 1.6% MoM, reinforcing positive momentum. However, single-family housing completions fell 7.4% from the previous month, highlighting ongoing challenges in meeting demand.

Builders are cautiously optimistic heading into 2025, supported by tight inventory in the resale market, where many homeowners are hesitant to sell due to mortgage rates exceeding 7%. The Federal Reserve is expected to ease rates modestly this year, which could help lower borrowing costs and support a gradual increase in single-family starts. Still, with mortgage rates projected to remain elevated, builders are focusing on incentives, including mortgage rate buydowns, to encourage cautious buyers.

As previously noted, during late 2024, we projected the housing market would begin its recovery in 2025, driven by pro-consumer spending policies and likely lower interest rates in the second half of the year.