In the intricate space of economic indicators, the Consumer Price Index (CPI) takes centre stage, revealing the pulse of consumer spending and inflation.
The recent revelations from the U.S. Bureau of Labor Statistics (BLS) have sent ripples through financial markets, sparking debates and reshaping expectations.
The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Indexes are available for the U.S. and various geographic areas. Average price data for select utility, automotive fuel, and food items are also available.
The US economy has made significant progress in curbing inflation, with the Consumer Price Index (CPI) remaining unchanged in October from the previous month. This represents the lowest CPI reading in fifteen months.
On an annual basis, inflation in the US declined to 3.2% in October, falling below market expectations of 3.3% and September’s inflation print of 3.7%. The decline in inflation is primarily attributed to a drop in gasoline prices.
These positive developments were welcomed by Federal Reserve Chair Jerome Powell, who acknowledged the progress made in combating inflation at the recent FOMC press conference. He stated, “The economy has been able to achieve pretty significant progress on inflation without seeing the kind of increase in unemployment that has been very typical of rate hiking cycles like this one.”
Market Reactions
The release of the October CPI data sent shockwaves through financial markets, with stocks surging, bond yields plunging, and the US dollar weakening against major rivals. The positive market reaction was driven by several factors, including softer-than-expected inflation readings, easing of Fed tightening expectations, and improved risk sentiment.
Equity Markets:
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The Nasdaq 100 led the gains by rallying more than 2% to close up 329.69 points, exiting the correction territory and closing above the trendline for 3 consecutive days as shown in the chart below.
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The Dow Jones Industrial Average surged 1.43% (489.83 points)
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The S&P 500 rose 1.91% (84.13 points)
Bond Markets:
- The yield on the benchmark 10-year Treasury note tumbled 19.1 basis points to 4.451%.
- The yield on the 2-year Treasury notes, which is more sensitive to Fed policy expectations, dropped to 4.83% from 5.045%.
Currencies:
- USD/INR: The Indian rupee strengthened most in two months against the US dollar at the opening bell, tracking gains across Asian currencies after a soft US inflation tick and closed at RS 82.9530, down 0.2350 points or -0.28%, the lowest since September.
- USD/EUR: The euro also strengthened, closing down 1.67% at EUR 0.919.
Looking ahead, a prevailing narrative emerges—one that suggests the U.S. central bank’s monetary policy tightening campaign is drawing to a close. However, Powell and other policymakers have pushed back against this notion, emphasizing their commitment to adjust policy as needed. Since March 2022, the Fed has raised its policy rate by a substantial 525 basis points to the current 5.25%-5.50% band.
As headline CPI inflation continues its downward trend, remaining above the Fed’s 2% target, and the core rate hovers persistently above 4%, the debate within the FOMC intensifies. Powell, while cautious against being misled by a few months of good data, has not ruled out additional rate hikes in the future. The official Fed forecast still hints at one more 25 basis point increase in interest rates for the year, with the last rate hike occurring in July 2023.
In this dynamic economic landscape, the journey ahead remains uncertain. The markets, economists, and policymakers are all eyes on the evolving scenario, awaiting cues on whether the U.S. can sustain its progress on the inflation front or if further policy adjustments are on the horizon.
Disclaimer: This post has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.