Higher for longer after all…

Equity markets participants showed their approval of the re-election of President Trump as the markets surged to record highs in the following days. Further adding to market sentiment was Fed Chair Powell’s announcement of a quarter percentage point cut to the overnight lending rate. Some of the initial post-election market enthusiasm faded as global geopolitical risks escalated. International tensions escalated following the U.S. authorization for the Ukraine to attack Russian territory of Ukraine’s with American supplied long-range missiles. Somewhat counterintuitively, long-term interest rates have surged in recent days to 6-month highs on growing fears that Trump Administration policies could reignite inflationary pressures.

The Fed’s chair stated that “the economy is not sending any signals that we need to be in a hurry to lower rates. The strength we are currently seeing in the economy gives us the ability to approach our decisions carefully.” On the back of these announcements, experts reduced the likelihood of a December rate cut to 60% from prior expectations of an 80% likelihood. Additionally, traders have reduced expectations of rate cuts by 1 percentage point with forecasts now anticipating overnight rates of 3.9% by year-end 2026 rather than prior forecasts of 2.9%

On the inflation front, last week’s Consumer Price Index (CPI) and Producers Price Index (PPI) data were released with both figures meeting expectations. The CPI showed an annual increase of 3.3% with more than half of the gain being attributed to housing costs. The PPI print came in at 2.4% – a stark increase from the previous month of 1.9%. Both figures, echoing Chair Powell’s commentary, indicated that there are some inflationary components that remain elevated and may be taking longer than previously anticipated to decline to more acceptable levels.