The October consumer price index (CPI) print may be a pivotal moment for interest rates to stop rising and enter a period of observation, during which policymakers will assess whether inflation will continue its glide toward the 2% level. Federal Reserve chair Jerome Powell, however, warned last week that the Fed will not be “misled by a few good months of data.”
Given the recent gloom and doom in the market, on the back of rising rates and the perceived stickiness of inflation, yesterday’s headline US CPI print came as a positive surprise. Expected to come in at 3.3%, it was at 3.2% for October, down from 3.7% in September.
It came as a breath of fresh air for stock markets, which rallied hard (S&P 500: +1.9%; Nasdaq Composite: 2.4%), whereas the whole yield curve moved lower. Moreover, the core CPI dipped to 4%, below forecasts and the September print of 4.1%.
Despite the expected significant slowdown in the US economy in Q4 and the first half of next year, mastering inflation and bringing it towards 2.0% is seen as necessary for the Fed to act strongly with lower rates sometimes in 2024. The market may have concluded that rates are now sufficiently high to bring inflation down to the Fed target.
The market is currently pricing a 95% chance that the Fed’s rates will stay put at the next meeting, while it has already started--in recent days--to price-in rate cuts in 2024, a scenario that has become now more likely.
A better yield environment may lessen market concerns related to high refinancing costs for the coming months--and even years--implied by repeated statements from Fed officials of “higher for longer.”