Fundamental Analysis

Equities Soar on Surprise Dip in US Inflation

  • US inflation data for October came in lower than expected.
  • Official data indicated a slightly slower growth in wages in Britain.
  • There was a marginal contraction in the Eurozone economy in the third quarter.

Equities surged on Tuesday as US inflation data for October came in lower than expected. The data sparked investor confidence at the end of an era of interest rate hikes and the possibility of imminent reductions in borrowing costs. 

US inflation (Source: Bureau of Labor Statistics)

US inflation (Source: Bureau of Labor Statistics)

Data revealed that US consumer prices remained steady in October due to a decline in gasoline prices, while underlying inflation showed signs of deceleration. The Consumer Price Index rose by 0.2%, excluding volatile food and energy components.

Brian Jacobsen from Annex Wealth Management in Wisconsin declared the end of the rate-hiking era. Investors will now shift towards predicting when the US Federal Reserve will start cutting rates. 

Following the day’s data, there was a notable shift in expectations regarding the Federal Reserve’s potential rate cuts next year. On Tuesday, U.S. rate futures reflected a 65% probability of a rate cut in May, a substantial increase from the 34% probability observed late on Monday.

At the same time, Treasury yields fell on Tuesday due to expectations of a potential peak in US rates. US two-year yields, which show interest rate expectations, reached two-week lows at 4.8318%, marking the most substantial one-day drop since May 4. 

The Israel-Hamas conflict prompted risk aversion among traders in October. Still, global stocks rebounded nearly 5% this month as investors speculated that major central banks had ended an extended period of rate hikes.

The pan-European STOXX 600 experienced a 1.3% increase following the soft US inflation report.

In a weekend interview, European Central Bank President Christine Lagarde stated that no changes to interest rates should be anticipated in the “next couple of quarters.”  It means the bank plans to hold high rates for some time to fight inflation.

Meanwhile, a new estimate indicated a slight contraction in the Eurozone economy in the third quarter, reinforcing expectations of a technical recession. 

British stocks rallied on Tuesday, reversing early losses, with the domestically-focused FTSE 250 index reaching a seven-week high. It rose due to the indications of easing inflation in the US. 

Meanwhile, official data on Tuesday indicated a slightly slower wage growth in Britain for the three months leading to September. Earlier, wages had surged at a record pace, leading to vigilance from the Bank of England regarding inflation.