Notes from the Desk – US CPI – Encouraging News
The US October CPI report saw both headline and core inflation softer than expected.
By the numbers.
- YoY CPI 3.2% (3.3% expected)
- YoY Core inflation 4% (4.1% expected)
Implications.
The downside surprises were seen in shelter costs, negative core goods prices, and falling used car and hotel prices. Although we expect the Federal Reserve to continue to ‘talk tough,’ the probability is very high that we have seen the last of the rate hikes for this cycle.
Market reaction.
Yields have fallen approximately 20 bps across the curve as the bond market moves to reflect the possibility of rate cuts starting next summer. The promise of lower yields is fueling a rally in equities and credit. The possibility of a ‘Santa Clause Rally,’ which had looked dim a few days ago, has improved significantly.
