The consumer price index data in the US has been published, according to which the inflation in the US in October is 7.7%, below market expectations for a drop in inflation to an annual rate of 8%. At a monthly rate, this is an increase of only 0.4% below the market expectation of 0.6%. This is good news for the market and a decrease compared to 8.2% in September, when as I recall the market reacted by falling.
Core inflation is at an annual rate of 6.3%, better than economists’ expectations of 6.5%. The core index on a monthly basis rose by only 0.3%, when the expectation was 0.5%. As I recall – in September there was an increase in the index of 6.6% and 0.6% respectively.
What does it mean for the Fed and what does it mean for the market?
The capital market naturally reacts immediately with joy. Contracts on the indices jump: contracts on the Nasdaq jump by 3%, those on the S&P500 jump by 2%.
The good data is a calming siren for the market. If the data continues to be good next month as well, this will allow the Fed to slow down the rate of interest rate increases. Futures on the Fed’s next interest rate decision on December 14th (34 days away) are now divided between a 0.5% rate hike and a 0.75% rate hike at the next meeting. The probabilities stand at 57% in favor of a lower increase of 0.5%.
It should be noted – the next interest rate decision is in 34 days, which means that the consumer price index for the month of December is expected to be published earlier and it will also affect the next interest rate decision.
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Bond yields are now falling only slightly, with 10-year government bond yields down 0.2%, an improvement from a 1% drop before the data was released. 15:40 update: Bond yields fall 5%. The 10-year government yield falls back below 4% and now stands at 3.98%. Two-year yields also fall to 4.34%
At the same time, the data of the initial claims for unemployment benefits were published. According to the data, while the expectation was 220,000 claims, in practice there were 225,000 claims, meaning there were more claims than expected. In normal times this is not a good sign, but times now are not normal. The goal of the Fed is to cool the market, which also means an increase in unemployment.
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