Christmas came early for equity markets as weaker than expected US CPI figures boosted hopes that pricing pressures are easing across the pond, relieving some of the pressure on the Federal Reserve as it meets to consider its next move on interest rates.
While analysts do not expect a change to the widely touted 50bp rate rise by the Fed tomorrow, they do now see the peak level of rates being lower than previously forecast.
The consumer price index rose by 7.1% year on year in November, a sharp decline on the 7.7% recorded in October and lower than the expected figure of 7.3%, while annual core CPI, which excludes volatile food and energy prices, declined to 6% from 6.3% in October.
“It feels like a turning point has been reached and while not every country is in the same place, at least there is scope for optimism” commented Danni Hewson, financial analyst at AJ Bell.
Equity markets bounced with the Dow Jones Industrial Average up 283 points and the FTSE 100 up around 80 points while the dollar sold off against all major currencies as markets priced in a lower peak Fed funds rate.
ING Economics suggested the soft US inflation number will reinforce the view that the interest rate peak is in sight.
It retained its call for a 50bp rate hike tomorrow but believes “there's less chance of a rate above 5% in 2023.”
Recessionary forces will mean rate cuts are on the agenda in the second half of 2023 it suggested.
Simon Harvey, head of FX analysis at Monex Europe, agreed about tomorrow’s decision noting swap market pricing for the Fed’s December meeting remained fairly stable at 50bps but he pointed out most of the adjustment occurs further down the curve.
“The probability of a 50bp hike at February’s meeting almost halved to 28%, while terminal rate pricing for June’s meeting fell 20bps from 5% to 4.8%.” he pointed out.
He added the market is increasingly pricing in a rate cut by the Fed in the second half of next year.
Ian Shepherdson, chief economist at Pantheon Macroeconomics also agreed the numbers did not change tomorrow’s Fed decision; “they will hike by 50bp.”
“But Chair Powell’s tone likely will be less aggressively hawkish than in November, and his more dovish colleagues likely will be emboldened by this report” he forecast.
“We now think 25bp is more likely on Feb 1, and we think that will be the final hike.”