Financial markets rally as US inflation data comes close to expected

With the US inflation data coming in close to expected and increasing the potential for easing by the end of 2024, the subsequent market reactions suggest expectations were on the stronger side. Stocks continued their optimistic rally, and the US dollar weakened, triggering a wave of optimism and speculation about a potential easing in the Federal Reserve's (Fed) rate hike trajectory.

Key developments

• US Consumer Price Index (CPI): The CPI for October remained unchanged, defying forecasts of a 0.1% increase. This critical indicator's stability suggests a potential shift in the Fed’s monetary policy stance.
  
• Core CPI: The core CPI saw a modest rise of just 0.2%, lower than the anticipated 0.3%.
  
• Stock market response: This data spurred a rally in global stocks, with significant gains in Asian markets and a strong performance by the Nasdaq Composite. Notably, the US500 index edged closer to the upper end of its recent range, standing at around 4524.

Market responses

• Bond market: Bond prices surged, inversely affecting yields and reflecting a market recalibration of interest rate expectations. The US yield curve is pricing in no further rate hikes and instead, the probability of a rate cut in 2024 is increasing.
  
• Currency movements: The US dollar weakened, particularly against risk-sensitive currencies. In forex markets, the USD/JPY pair fell to a low of 150.153 but didn’t drop as much as expected, showing signs of continued JPY weakness. Meanwhile, GBP/USD rallied to just above 1.25.  
  
• Yields: Two-year Treasury yields dropped, mirroring the market's reassessment of the Fed’s imminent policy decisions.

Analyst insights

• Some financial analysts are optimistic, viewing these trends as signs of easing inflationary pressures. Others are not so optimistic, pointing to wars in Ukraine and Gaza as further stimulus for inflationary pressures. The Fed will no doubt want to receive more data before they provide the markets with a stronger signal for easing. 
  

Global impact

• China: The People's Bank of China has responded by increasing liquidity and maintaining a steady interest rate policy.
  
• Japan: The Bank of Japan adjusted its bond purchasing strategy, reflecting a global reaction to the US data.

Looking forward

• Retail sales data: October's retail sales figures are attracting significant attention following their impressive performance in September. A weaker reading could prompt speculation about slowing growth contributing to reduced inflation, potentially influencing expectations for a more cautious approach from the Fed. However, it's worth noting that US economic data has frequently outperformed expectations. Therefore, it may still be too early to anticipate a series of weaker economic indicators.
  
• The financial market remains sensitive to economic indicators, seeking to understand the direction of both the US and global economies.

Conclusion

Following yesterday’s US inflation release, there might be a potential for a policy shift, however, it's still too early to determine exactly what direction this might take. Presently, stocks continue their upward trajectory, buoyed by optimism. If markets are too hasty in anticipating easing, it could potentially lead to some trading opportunities.

Deriv’s Market Radar, 14 November