On the macro front, this week the focus is on US inflation data. On the political front, the result of the US midterm election is still uncertain, with the US Senate currently in parity (at the time of writing) and the House of Representatives likely to be under the control of the Republicans. “While the press and the pundits are predicting a giant red wave, it didn’t happen” said President Biden on midterm polls in a press conference on Wednesday.
The freshly released US inflation data (CPI) came after the Fed raised its interest rate by another 75 basis points at its November meeting. Chicago Fed President Charles Evans stated that it’s time to slow the pace of the hikes, while Minneapolis Fed President Neel Kashkari said that 50 basis points and 70 basis point rate hike are both on the table for the next meeting. After the data was released, the CME FedWatch Tool was showing around 81% probability of a 50 basis point increase at the next and last meeting of the year.
Both the US headline and core inflation data increased less than expected by economists. According to the US Bureau of Labor Statistics, the CPI slowed to 7.7% year-over-year in October 2022, the lowest since January and well below the market forecast of 8.0%. Core CPI also eased to 6.3% in October 2022, from 6.6% the prior month and below the market forecast of 6.5%.
This allowed the occurrence of an event that had not been seen for a long time after a US macro data, namely the decline in Fed Swaps: Fed Swaps downgrade 75-basis-point rate hike in December.
Market participants have been engaging in purchases on all major stock indices. Softer than anticipated inflation data signals that price dynamic is significantly declining therefore leading to a less hawkish stance from central banks, especially the Fed.