Markets Extend Rally After CPI Report

The United States experienced a slight deceleration in its annual inflation rate in November, in line with expectations. According to data released by the Bureau of Labour Statistics on Tuesday, the year-on-year growth in headline consumer prices declined to 3.1% last month, down from 3.2% in October. The month-on-month reading showed a marginal uptick of 0.1% against projections from economists 0.0%

The closely monitored “core” figure, which excludes volatile items such as food and energy, recorded an annual rise of 4.0%, unchanged from the previous month. On a monthly basis, underlying price gains accelerated marginally to 0.3%, compared to 0.2% in October.

Markets have been pricing that the central bank may initiate rate cuts as early as March next year, propelling the equity benchmark index to a new high of 4,632 for 2023. The strong rally from the October lows unfolded despite Federal Reserve Chair Jerome Powell emphasizing the Fed’ cautious approach, until a proof that still heightened inflation is under control. Despite the strongly overbought momentum readings, the index appears on track to challenge its previous record high of 4,818.

Source: TradingView

In the final monetary policy meeting by the Federal Reserve for this year, which is scheduled to conclude on Wednesday, the Fed is expected to maintain interest rates on hold in the range of 5.25% to 5.50%. Tuesday’s inflation report does not support further interest rate hikes. Fed officials said number of times that inflation deceleration would be on a bumpy ride and Tuesday’s report is one of them. Still inflation is on the right path as it is decelerating, although slowly.

The labour market has been gradually softening and the Fed is likely to maintain its cautious, data-dependent policy approach heading into the new year when is considering starting to lower interest rates.

On Wednesday attention is likely to be concentrated on statements from Fed chair Jerome Powell, particularly regarding the central bank’s plans for potential rate cuts in 2024. The release of the Fed’s quarterly “dot plot” which outlines policymakers’ projections for future rates, will be closely scrutinized.

Investors are focused on when rate cuts will start and how fast they’ll go. Markets are currently assigning an almost 50% probability of a rate reduction in May next year, according to the CME FedWatch Tool. The chances of a rate cut in March have dropped to 47% from 57% a week earlier. Overall, Wall Street is already pricing in four rate cuts for 2024 expecting one full percentage point reduction.

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