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US inflation fell more than expected to 3.2 per cent in October, setting off rallies in bonds and stocks.
Tuesday’s consumer price data represented the first decline in headline inflation for four months and compared with a 3.7 per cent rise in the year to September. The 3.2 per cent figure was also marginally below expectations of 3.3 per cent.
Treasury yields, which move inversely to prices, plunged after the publication of the data while stock futures surged.
Yields on rate-sensitive two-year Treasuries dropped 0.13 percentage points to 4.9 per cent, while yields on benchmark 10-year Treasuries fell 0.14 percentage points to 4.48 per cent.
Contracts tracking Wall Street’s benchmark S&P 500 and those tracking the tech-heavy Nasdaq 100 rose 1.3 per cent and 1.6 per cent respectively, ahead of the New York open.
The dollar fell 0.6 per cent against a basket of six other major currencies.
The Fed held its benchmark interest rate steady at a 22-year high earlier this month, and investors have become increasingly confident that rates have peaked as inflation has come under control.
Core inflation — which strips out volatile food and energy prices — was also slightly weaker than economists had predicted, dipping from 4.1 per cent to 4.0 per cent on a year on year basis. Core inflation rose by 0.2 per cent month on month.
Fed chair Jay Powell stressed last week that policymakers would not be “misled by a few good months of data”, and that the central bank could tighten monetary policy further if necessary, although officials have shown little intention of immediately raising rates beyond the current range of 5.25-5.5 per cent.
Stronger-than-expected gross domestic product growth has fanned fears that the slowdown in inflation could stall, but Powell said last week that he and his colleagues expected the pace of economic expansion to slow.
Instead of another rate rise, the Fed is increasingly expected to push back the timing of rate cuts deeper into 2024 if consumer prices remain stubbornly high.
One potential hitch is that more confidence over the economy could push down Treasury bond yields, in turn driving down the cost of capital for companies, thereby triggering another rise in inflation.
Tightening financial conditions in equity and bond markets earlier in the autumn had been welcomed by Fed officials, who said they could negate the need for another rate rise. But that optimism boosted markets, causing conditions to loosen again and leading some investors to warn of an “endless loop”.
“We’re going to continue to need to see tight financial conditions in order to bring inflation to 2 per cent in a timely and sustainable way,” Lorie Logan, president of the Dallas Fed and a voting member on the Federal Open Market Committee, said last week.
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