Softer CPI Print is Music to the Ears of Equity Markets

The softer US inflation data was music to the ears of equity markets, with investors now more convinced that we may now already be at the peak interest rate setting of the cycle. US headline and core CPI both undershot expectations which had traders starting to think about potential rate cuts in 2024 rather than any further rate hikes from the FOMC.

But is this switch in focus from tightening to loosening of policy too premature? The one thing we have learned over the course of the last two years is that the path of inflation is not a linear one. So, while the CPI is heading in the right direction for now as far as risk-assets are concerned, it can be prone to switching course, as we witnessed during Q3 with energy prices marching higher. As such, there is a hope rather than a guarantee that inflation will behave from here on out. If the current trend holds then the Fed is done with rates, but that remains a significant ‘if’. For the Fed and other central banks around the world, data-dependency will remain the order of the day when shaping interest rate policy.

While stocks were on the ascent following the soft CPI print, bond yields traded in the opposite direction on re-jigged rate expectations. The 10-year yield sunk below the 4.5% level, dragging the DXY(Dollar Index) with it. The chart of the USD looks like it fell off a cliff following the inflation gauge, with the euro, sterling and Aussie dollar all registering solid gains against their US counterpart.

While the CPI release was a key event, we are not done yet this week with potentially market-moving economic releases, with US PPI and Retail Sales figures also due in the coming sessions. If these 2 data sets happen to mirror the direction of the CPI figures, then we could see a continuation of the stocks rising/bond yields falling theme. However, any upside surprises in the upcoming macro indicators could serve to temper the current risk-on enthusiasm.

Oil is trading tepidly with the WTI contract still tradingat sub $80 per barrel levels. The OPEC outlook which painted a positive picturefor crude eased some demand concerns, however traders will be awaiting furtherChinese economic indicators before to see if OPEC’s take on the demand pictureis justified. Upcoming US crude oil inventory data will be closely watched,particularly now that supply concerns stemming from Middle East tensions haswaned.

Asian equity markets have followed the positive tone set by Wall Street. But it will be PPI and Retail Sales data which could decide whether the buoyant mood on equity markets can be extended.