Inflation Drop Triggers Market Rally: Economists Reassess After Surprising October Results

The October Consumer Price Index (CPI) report delivered positive news in the U.S. economy’s fight against inflationary pressures.

In October, the annual inflation rate decreased from 3.7% to 3.2%, below the economists’ anticipated 3.3% projection. Simultaneously, the core inflation measure, closely watched by the Federal Reserve, which excludes energy and food prices, also declined more than expected to 4%, reaching its lowest point in more than two years and indicating that underlying price pressures are heading towards the right direction.

As Benzinga delves into the nuances of this pivotal economic report, we will examine perspectives from prominent financial analysts and economists and assess how the financial markets are reacting to these developments.

Expert Insights On October’s CPI Report

• Charlie Ripley, senior investment strategist at Allianz Investment Management, highlights the moderation in headline CPI and the unexpected dip in core consumer prices. The continued deflation in sectors like used cars and a softer-than-expected service sector inflation indicate progress in the Federal Reserve’s policy effectiveness.
  
  “It is hard to envision the Fed will need to administer another rate hike at the December meeting and the market is clearly reflecting that,” Ripley said.
  
• Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, emphasizes the CPI’s notable drop year-over-year, signaling an end to the Fed’s rate hikes. Despite recession uncertainties, strong consumer spending, low unemployment, and robust corporate profits suggest a continued market rally.
  
  “Whether or not the economy can stay out of recession remains to be seen, but the stock market should continue to rally as people begin to accept that higher rates are off the table,” Zaccarelli said.
  
• David Goebel associate director of investment strategy Evelyn Partners, notes the gradual approach of inflation towards the Fed’s 2% target. Despite a slowdown in progress and the hawkish stance of the FOMC, Goebel believes significant rate cuts are not imminent.
  
  Goebel thinks Fed policymakers will “continue with their wait and see attitude” on rate hikes, warning that both the Fed and investors will continue monitoring the softening in the labor market.
  
• Quincy Krosby, global chief strategist for LPL Financial, warns of the “last mile” challenge in the Fed’s inflation control efforts, highlighting the importance of consumer inflation expectations.
  
  “Consumer expectations for inflation over a one-year and three-five-year period need to adjust downward, for the Fed to feel comfortable in declaring victory,” Krosby stated.

Markets Rally Post CPI, Dollar Sinks

Following the CPI report, traders adjusted their expectations for the Federal Reserve’s decision to keep interest rates unchanged in December, increasing the probability from 85% to 94%, according to the CME Group’s FedWatch Tool. At the same time, the market has factored in four rate cuts for next year, starting in May 2024.

The U.S. dollar index (DXY), as represented by the Invesco DB USD Index Bullish Fund ETF UUP, experienced a decline of 1.1% on Tuesday, marking its worst-performing session in 2023.

Chart: Greenback On Track For Its Worst Session Of The Year

U.S. Treasury yields also experienced a substantial drop, with the 2-year yield, sensitive to policy changes, falling by 18 basis points to 4.86%. The 10-year yield declined by 19 basis points to 4.45%, reaching its lowest level since late September.

The popular iShares 20+ Year Treasury Bond ETF TLT surged by 2.3%.

U.S. stocks saw significant gains, with the SPDR S&P 500 ETF Trust SPY rising by 1.8%, the Dow Jones Industrial Average ETF DIA increasing by 1.4%, and the technology-heavy Invesco QQQ Trust QQQ surging by 2%.

Small-cap stocks, as represented by the iShares Russell 2000 ETF IWM, experienced a robust rally of 3.8%.

The best-performing industries included solar stocks and gold miners, with the VanEck Gold Miners ETF GDX soaring by 4%, while the Invesco Solar ETF TAN rallied by 7%.

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