A surprise drops in both headline and core inflation in the U.S. sent equity markets surging while the U.S. dollar index and Treasury yields plunged, as optimism grew that the Federal Reserve could shift to softer interest rate hikes in the coming months. On Thursday the U.S. Bureau of Labor Statistics released the Consumer Price Index (CPI) for October, showing that the annual inflation rate eased to 7.7%, below forecasts of 8%, and below September’s print of 8.2%.
The core CPI, which excludes the volatile food and energy prices, advanced 6.3% on an annual basis in October, after rising to a 40-year high of 6.6% in September and compared with market expectations of 6.5% gain.
The monthly headline CPI increased 0.4% in October, unchanged from September, and less than economist’s expectations of 0.6%. Monthly core Inflation, the Federal Reserve’s preferred CPI gauge, slowed to 0.3% from a previous 0.6%. After months of stubborn inflation glimmers of hope has emerged. While inflation is still high and painful, it is finally beginning to show signs of turning a corner. The CPI report provided early evidence that the Fed’s efforts to slow persistently high inflation has started easing price pressures. The central bank has lifted interest rates from near zero to nearly 4% in 2022 aiming to slow consumer demand.
The lower inflation readings acted as a strong headwind for the markets, invigorating hopes that the Federal Reserve might consider a modest 50-basis-point hike at the December meeting. The S&P 500 index jumped more than 5.5% on Thursday (its best one-day performance since April 2020), after the inflation data was released. The massive move came amid a significant retreat in the U.S. dollar and Treasury yields, as investors adjust rate hike expectations.
According to the CME’s Fedwatch tool, markets are now pricing in 85% chances of a smaller 50-basis-point rate increase at the conclusion of the December FOMC policy meeting, and a 55% likelihood of a 25-basis-point hike at the January meeting.
On Thursday, a few Fed officials suggested that interest rates will still need to rise to a level where they are clearly weighing down the economy, even if the pace is slower. Once rates are high enough, the Fed is likely to hold them there for some time.
Also, the market is now expecting a lower terminal rate. The benchmark U.S. 10-year Treasury yield plummeted a whopping 26 basis points from 4.09% to 3.83%, while the two-year U.S. Treasuries slipped from 4.58% to 4.33%.
Despite the reduction of the inflation rate in October, it is still far away from the Federal Reserve’s 2% target. Price increases remain far faster than target and are expected to remain abnormally brisk till the end of 2022. A single month of modest improvement in the data is not enough to raise confidence that the rapid price increases will quickly ease. As a reminder, we have seen several false declines in the CPI print throughout 2022. Still, the underlying details of the CPI report showed encouraging trends, which could help inflation cool down more meaningfully in 2023.
The S&P 500 index is fast approaching its dynamic resistance from its medium-term down trend line crossing at 4,100 where selling pressure is likely to emerge. We still see the rebound from the October 2022 low as a rally within the overall bear market, and we think it’s a matter of time before investors curb their enthusiasm triggered by the latest CPI data. Traders need to maintain a doze of healthy scepticism as fiscal policy impacts have not been fully reflected into the recent equity market moves.
Nimble traders looking to gain exposure to the S&P 500 index may use our 3x Long US 500 ETP to take advantage of short-term rebounds, and our -3x Short US 500 ETP to capture short-term declines.
Sandeep joined Leverage Shares in September 2020. He leads research on existing and new product lines, asset classes, and strategies, with special emphasis on analysis of recent events and developments.
Sandeep has longstanding experience with financial markets. Starting with a Chicago-based hedge fund as a financial engineer, his career has spanned a variety of domains and organizations over a course of 8 years – from Barclays Capital’s Prime Services Division to (most recently) Nasdaq’s Index Research Team.
Sandeep holds an M.S. in Finance as well as an MBA from Illinois Institute of Technology Chicago.
Violeta joined Leverage Shares in September 2022. She is responsible for conducting technical analysis, macro and equity research, providing valuable insights to help shape investment strategies for clients.
Prior to joining LS, Violeta worked at several high-profile investment firms in Australia, such as Tollhurst and Morgans Financial where she spent the past 12 years of her career.
Violeta is a certified market technician from the Australian Technical Analysts Association and holds a Post Graduate Diploma of Applied Finance and Investment from Kaplan Professional (FINSIA), Australia, where she was a lecturer for a number of years.
Julian joined Leverage Shares in 2018 as part of the company’s premier expansion in Eastern Europe. He is responsible for web content and raising brand awareness.
Julian has been academically involved with economics, psychology, sociology, European politics & linguistics. He has experience in business development and marketing through business ventures of his own.
For Julian, Leverage Shares is an innovator in the field of finance & fintech, and he always looks forward with excitement to share the next big news with investors in the UK & Europe.
Oktay joined Leverage Shares in late 2019. He is responsible for driving business growth by maintaining key relationships and developing sales activity across English-speaking markets.
He joined LS from UniCredit, where he was a corporate relationship manager for multinationals. His previous experience is in corporate finance and fund administration at firms like IBM Bulgaria and DeGiro / FundShare.
Oktay holds a BA in Finance & Accounting and a post-graduate certificate in Entrepreneurship from Babson College. He is also a CFA charterholder.
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