Investors welcomed news yesterday that the US Consumer Price Index (CPI) for October slowed more than expected. Stock indices rose and treasury bonds fell. The change in market sentiment to the positive has investors betting the Federal Reserve (Fed) will cut rates next year.
US CPI For October Slowed More Than Expected
The battle against inflation in the US is seen to be paying off as it slowed more than expected in October. This is good news for Fed officials who started one of the largest monetary policy tightening operations to combat persistent inflation.
The US CPI rose 3.2% in October on an annualized basis, slowing from a rate of 3.7% in September. On a month-on-month basis, the CPI was unchanged, compared to a 0.4% gain in September.
Economists had forecast a 3.3% annual increase, and a 0.1% increase from the previous month.
Investors Widely Expect the Fed to Cut Rates Next Year
This data is especially relevant after Powell's comments last week. The Fed Chair indicated that raising interest rates was still a possibility if inflation stayed above the 2% target. His words lead the market to expect the Fed to hold firm at the last meeting of the year.
However, the CPI result published yesterday has investors speculating in the opposite direction. They now widely expect the Fed’s next step to be cutting rates next year.
Stock Indices Surged on CPI News
The yield of 10-year Treasury bond plummeted to 4.45% after the CPI figures were released, the lowest level since last September. Stock market investors received the news positively and brought indices such as the S&P500 and the Nasdaq100 up by more than 2%.
The EUR/USD Gained More Than 150 Pips
In the foreign exchange market, the US Dollar was pushed down by the extraordinary drop in market interest rates. The US Dollar maintains a positive correlation with interest rates.
The EUR/USD pair experienced one of the largest daily advances of the entire year. It gained more than 150 pips and showed technical signals of a reversal of the bearish trend that has been running since July.
Confirmation that rate hikes in the US are over and that the Fed’s next move will be a rate cut would strengthen the EUR/USD bullish movement. This would technically have a first target in the zone of 1.0960 (0.618% Fibonacci retracement level).
EUR/USD monthly chart, November 15, 2023. Source: CAPEX.com WebTrader.
US Retail Sales Data Due Out Today
Today the Retail Sales Data is expected to be published. This data shows the state of domestic demand and is a main component of GDP. It is also a factor the Fed take into account when making decisions. A retail sales figure showing weakening demand would support current market sentiment for lower interest rates in the near future.
- US October CPI showed inflation slowed down more than expected.
- Investors now widely expect the Fed to cut rates next year.
- The 10-year Treasury bond fell to its lowest level since September.
- The S&P500 and Nasdaq100 indices increased by more than 2%.
- The EUR/USD pair had one of the largest daily increases of the entire year.
- US retail sales data is expected out today.
Sources: Bloomberg, Reuters