The annual Consumer Price Index rose 3.2% in October down from 3.7% the prior month, reaching its lowest yearly rate since early 2021 according to data released Tuesday by the Bureau of Labor Statistics. Core CPI, which excludes the volatile food and energy categories, rose 0.2% on a monthly basis, and 4% on an annual basis reaching its lowest level since September 2021.

The Producer Price Index for October showed more signs of slowing inflation, bolstering the case for no more hikes. US wholesale inflation fell 0.5% on a monthly basis, down from the 0.4% jump in September. The decline is also the sharpest monthly drop since April 2020.

According to the CME FedWatch Tool traders are even more encouraged and have taken another hike completely off the table. Futures now assign an 80% probability of a rate cut by May, despite economists warning that it’s unlikely that the Fed will ease monetary policy anytime soon unless economic conditions deteriorate significantly.

Source: TradingView

The U.S. benchmark experienced severe losses throughout 2022 as the Fed responded to record inflation and hiked the federal funds rate up from near-zero, to 5.25% – 5.5%, the highest level since 2001. Tightening campaigns typically precede recessions as higher borrowing costs cut into corporate profits and dampen consumer spending, but the U.S. economy has exhibited output growth and low unemployment levels throughout 2023.

This week’s stock and bond surge on news of a fresh decline in headline and ‘core’ U.S. consumer price inflation last month. The reports raised hopes the Federal Reserve won’t raise interest rates again during its current tightening cycle, thanks to a significant cooling in inflation. Even though Federal Reserve officials are refusing to fully rule out another interest rate hike traders are now virtually certain that the Fed will hold rates steady at its December policy meeting.

The market rallied to its strongest levels in months this week and while stocks are likely to continue to rise over the medium-term, as they continue to recover from last year’s steep losses, the index could struggle to return to its 2022 highs. In the short-term, a pull back to unwind the overbought momentum conditions can not be ruled out.