Is the Market Looking Through the Current Inflation?

by Steven Vanelli, CFA, Knowledge Leaders Capital

This Friday we’ll see where the US CPI comes out. We recently got the November print for the Eurozone CPI, and it came in hot, hitting 4.9% year over year.

This makes it all the more interesting to see the latest ZEW Inflation expectations for Germany. It has plunged from 80% expecting higher inflation just a few months ago to 37.4% expecting lower inflation in the future.

Its unclear yet whether US residents feel the same way, but investors are expressing the opinion that they foresee a shorter tightening cycle, ending at a lower terminal rate. We can see this in the Eurodollar futures market. The December 2025 Eurodollar future now trades at a 1bp discount to December 2024, i.e., the market is expecting no rate hikes into 2025. It also suggests that the terminal rate will be about 1.7%, below the Federal Reserve’s stated goal of a 2.5% terminal rate.

Of course markets move and this scenario may change, but to the extent that we are in for a shorter and shallower tightening cycle, this may be good for risk assets generally.

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