Investors breathed a collective sigh of relief as October’s inflation data aligned with economists’ forecasts, signaling potential easing for the Federal Reserve’s aggressive monetary policy. The Consumer Price Index (CPI) rose 2.6% year-over-year, marking a slight uptick from September’s 2.4% but ending a streak of six consecutive monthly declines.
While the headline inflation figure offered some reassurance, core inflation, which excludes volatile food and energy prices, remained stubbornly high at 3.3% for the third consecutive month. This persistent stickiness in underlying price pressures highlights the ongoing challenge for the Fed as it seeks to bring inflation back down to its 2% target.
The data sparked a flurry of speculation among market participants, bolstering bets on a December interest rate cut. The CME FedWatch tool now indicates a 79% probability of a 25-basis-point reduction in December, a significant jump from the 58% likelihood before the CPI report was released.
Echoing the market sentiment, Minneapolis Fed President Neel Kashkari expressed optimism about inflation’s trajectory, stating on Bloomberg TV, “I have confidence inflation is headed in the right direction.” Just a day prior, Kashkari had cautioned about the possibility of a rate pause in December if inflation data surprised to the upside.
“I am not yet seeing a lot of upside inflation risks; the bigger risk is getting stuck,” he added on Wednesday.
Market reactions were swift and positive, with US equity futures registering slight gains. Treasury yields and the dollar eased, reflecting increased expectations for a rate cut. The S&P 500, as tracked by the SPDR S&P 500 ETF Trust (SPY), rose 0.2%. The Nasdaq 100, followed by the Invesco QQQ Trust, Series 1 (QQQ), edged up 0.15%. Small caps outperformed their large-cap counterparts, with the iShares Russell 2000 (IWM) rallying 1.1% in pre-market trading.
Top-performing S&P 500 stocks during the premarket session included Charter Communications Inc. (CHTR), GE Vernova Inc. (GEV), and Albemarle Corp. (ALB), which surged 5.7%, 4%, and 3.7%, respectively. Conversely, Skyworks Solutions Inc. (SWKS), Fair Isaac Corp. (FICO), and Bio-Techne Corp. (TECH) lagged behind, down 6.7%, 4.1%, and 2.8%, respectively.
Gold prices gained 0.3% after three consecutive sessions of declines. The U.S. dollar index (DXY) eased slightly by 0.1%. Treasury-linked ETFs rose, with the iShares 20+ Year Treasury Bond ETF (TLT) up by 0.7%.
The latest inflation data has injected a dose of optimism into markets, shifting the focus toward a potential rate cut in December. As the Fed navigates the delicate balance between inflation and economic growth, investors will be closely monitoring future economic releases for any further clues about the direction of monetary policy.
