Deja vu. Exactly one year ago, after the release of October inflation data, Treasury yields collapsed, stock indices soared, and seriously weakened against major world currencies. Then the slowdown in CPI from 8.2% to 7.7%, the lowest level since January, was a signal that the Fed’s work was bearing fruit. The chances of a 50 bp increase in the federal funds rate in December 2022 collapsed from 80% to 50%, and began their confident ascent.
A year later, history repeated itself. This time they slowed down from 3.7% to 3.2%, from 4.1% to 4%, the minimum level since September 2021, and the absence of its growth on a monthly basis occurred for the first time since July 2022. Nowadays, markets are not talking about an increase federal funds rates. They expect it to decrease. Such an outcome in May is estimated by derivatives at 65%, and in March – at 30%. It is not surprising that stock indices showed the best reaction to inflation since that memorable November 2022.
Reaction of stock indices to US inflation reports
In anticipation of an important release, the market did not want to buy the dollar on the “hawkish” comments of FOMC officials, knowing full well that they were part of policy. The Fed is forced to admit that the monetary restriction cycle is over, but if it announced this, investors would begin to bet on easing monetary policy. Financial conditions have improved, and the risks of accelerating inflation have increased.
However, you need to understand that no matter what the Fed says, its decisions will depend on incoming data. And slowing inflation is a compelling reason to fear that the dissipation of pandemic effects in the form of supply chain disruptions and fiscal stimulus will return to business as usual. A regime where the central bank had to deal with too low PCE. Could rates remain at elevated levels? No! This will definitely lead to a recession.
Dynamics of American inflation
Just as fears of losing credibility due to high inflation are forcing the Fed to tighten monetary policy, the risks of the economy returning to an era of low prices will force the central bank to lower rates. This is what the market is counting on when selling the US dollar.
The breathtaking rally of EUR/USD on actual consumer price data, which slightly deviated from forecasts, indicates how overbought the greenback was. The massive closing of longs on it brought the main currency pair to levels last seen in early September.
At first glance, the EUR/USD reaction to short-term numbers looks excessive, but the reversal of the downward trend announced in early November has become a reality. The gradual abandonment of the US dollar is just what the doctor ordered. We are preparing to hold longs formed from the levels of 1.0665 and 1.0725 for a long time. Targets at 1.088 and 1.094 have been met or are almost met. It’s time to set more serious goals. For example, 1.12. Recommendation – buy.
2023-11-15 07:08:00
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