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Fed Welcomes Signs of Deflation

Miguel A. Rodriguez
Miguel A. Rodriguez
10 November 2023

The stock market continued its upward trend last week after US data showed inflation is decreasing. Treasury bonds fell on encouragement that central banks could have reached the end of their rate hikes and the US Dollar dipped. 

Stock markets rally while treasury yields, and the US Dollar fall

Last week marked a turn in economic data and markets. Treasury yields plummeted and the US Dollar sank. Meanwhile, the stock market had its best week in a year.

The Non-farm Payroll and ISM Services PMI data were released on Friday. Both came out weaker than expected and that helped the stock markets continue their upward trend. Treasury yields fell further, and the US Dollar fell on the decline of interest rates.

For October the US Non-Farm payroll were 150,000, as opposed to the anticipated 180,000. At the same time, the unemployment rate rose to 3.9%, drawing near to the psychological level of 4%.

US data shows a slowing down US economy and reduction in inflation

The October ISM Services PMI for the US was 51.8, lower than the anticipated 53.0. The services sector, which has performed the best during the whole period of interest rate increases, is clearly showing signs of slowing down.

The Friday comments by some Federal Reserve (Fed) officials, including Thomas Barkin and Raphel Bostic, highlighted the Fed’s satisfaction on seeing the slowdown of the American economy. This shows that the effects of the restrictive monetary policy have been felt and wills serve to reduce inflation.  

The Nasdaq index had best performance of the year

Treasury bond yields fell to levels not seen since September with the 10-year bond trading below 4.50%. This helped to fuel a sharp increase in the stock market, especially the Nasdaq index, which experienced the best weekly performance of the year. The index achieved this even though the results of some of the technology companies during the earnings period disappointed investors. The fundamental factor now driving stock markets higher is the decline in Treasury bond yields given the evidence that the Fed, like other central banks, have reached the end of the rate hike cycle.

EUR/USD reaches new point since August

In the currency market, the US Dollar is beginning to give technical signals that point to the end of the bullish trend. Now pushed down by the decline in market interest rates, the EUR/USD pair advanced just over 100 pips on Friday and technically surpassed the 100- and 200-day moving averages. This is the first time this level has been reached since the end of August which, if confirmed, would open the way for the pair to levels above 1.0800.

EUR/USD monthly chart, November 6, 2023. Source: WebTrader. 

Key Takeaways

  • Treasury yields and the Dollar fell last week on US economic data.
  • Non-farm Payroll and ISM Services PMI data came out weaker than expected.
  • The slowing down of the US economy shows the Fed’s monetary policy stance is paying off.
  • The stock market continues to rise, with the Nasdaq index having the best performance of the year.
  • The EUR/USD pair could be on its way above 1.0800.

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Sources: Bloomberg, Reuters 






Miguel A. Rodriguez
Miguel A. Rodriguez

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