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Weaker US CPI boosts market sentiment

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Miguel A. Rodriguez
Miguel A. Rodriguez
05 November 2022
The US CPI figure released yesterday was well below what market analysts had anticipated

The month-on-month headline CPI for July was zero, while the core CPI rose by just 0.3%.

The market reaction was immediate, with the strong US dollar falling against all its counterparts. EUR/USD surpassed the resistance level of 1.0280, while the treasury bonds yields fell notably, and the stock markets welcomed the data of lower inflation with significant increases.

 

Still, there are more inflation figures to be released before the next Fed meeting, but this data suggests that prices have probably peaked already. This affects interest rate expectations. Now the market puts the odds of a 75-bps rate hike at the next Fed meeting at just 30%.

 

Today we will know other important price data, such as the production price index (PPI), that confirm or not the downward trend in prices. Today's figure is important for equity markets as a decline in producer prices would fuel expectations of improved corporate margins.

 

As usual, the index with the best performance has been the Nasdaq since it is the most sensitive to inflation and interest rates. Still, the behavior of the S&P500 is noteworthy from a technical perspective.

 

For the first time, the S&P500 has traded above the 100 and 200-day moving averages and has exceeded the last high of the previous bearish trend. If the trend is confirmed at a weekly close, it would mean the end of the bear market.

 

Even so, many analysts and institutional market participants remain pessimistic and play down the good inflation data. They argue that the metric is not an accurate figure and that the levels are still too high to lead the Federal Reserve to a change of direction in monetary policy.

It is certain that with inflation showing no signs of rising, the Federal Reserve will have more reasons not to act aggressively. And this is being reflected in the Treasury bond market with falling yields, the currency market with a weakening US Dollar, and stock markets that are close to saying goodbye to the bear market.

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Sources: Bloomberg, Reuters

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Miguel A. Rodriguez
Miguel A. Rodriguez
Financial Writer

Miguel worked for major financial institutions such as Banco Santander, and Banco Central-Hispano. He is a published author of currency trading books.