Markets rejoice after surprisingly cool inflation report

NEW YORK (Reuters) – U.S. stocks surged, the dollar slid and Treasury yields dropped on Thursday after a cooler-than-expected October consumer prices report suggested the Federal Reserve’s barrage of interest rate hikes are beginning to have their intended effect.

All three major U.S. stock indexes rebounded sharply on the heels of Wednesday’s sell-off, and the benchmark Treasury yield touched its lowest level in weeks and the greenback plunged. [MKTS/GLOB]

The Labor Department’s consumer price index rose 0.4% last month, matching September’s rise and much less than the 0.6% increase expected. In year through October, the CPI increased 7.7%, after rising 8.2% in September, the first time since February that the annual increase in the CPI was below 8%.

MARKET REACTION:

STOCKS: The Dow was up 3.44%, S&P 500 up 5.10% and Nasdaq up 6.72%

BONDS: The yield on 10-year Treasury notes was down 31.3 basis points at 3.829%; The two-year U.S. Treasury yield was down 29.6 basis points at 4.332%.

FOREX: The euro rallied against a tumbling dollar and was up 1.8%. The dollar index was off 2.2%

COMMENTS:

PETER TUZ, PRESIDENT, CHASE INVESTMENT COUNSEL, CHARLOTTESVILLE, VIRGINIA

“I’m surprised at the gain relative to the slight drop in inflation. There must have been a lot of money sitting on the sidelines. I hope today shows we’ve rounded the corner, but future (inflation) numbers will show one way of the other whether the trend continues.”

“Everything is risk-on again — rates are coming down, dollar is coming down, gold is going up on the weaker dollar.”

“It shows you how focused asset owners were on inflation compared to everything else going on in the world. We’re off to the races. It’s good to see, but I don’t know if it will continue.”

“The move today dwarfs the moves we’ve seen lately because of elections, earnings, and Fed actions. I’m surprised by the magnitude of it.”

“This is not just reshuffling. Everything is up. Investors are getting into risk assets again across the board. It’s a powerful sign that maybe what the Fed and central banks around the world are doing is going to work.”

VAN LUU, GLOBAL HEAD OF CURRENCY, RUSSELL INVESTMENTS, LONDON

“The softer than expected core CPI number is driving the big down move in the dollar. Together with stretched valuation (expensive) and sentiment (overbought) of the U.S. dollar, it explains the magnitude of the drop today in response to the lower-than-expected core CPI release.

“The CPI number is the first-order cause of the big move. A second-order driver is the big fall in US yields (down 25 basis points+ across the curve).

“For our own funds, we have considered a tactical short USD position recently, but we have not pulled the trigger yet. Today’s data point probably strengthens the case for the tactical position.”

YUNG-YU MA, CHIEF INVESTMENT STRATEGIST, BMO WEALTH MANAGEMENT, CHICAGO

“The better-than-expected CPI numbers are welcome but show a lot of underlying volatility. Probably the biggest positive factor was that the strong increase in shelter costs contributed to over half of the CPI increase on the month and by the summer of next year that should begin to soften. Some other elements that brought down CPI on the month, such as falling natural gas prices and medical care services have a good chance of turning higher in coming months. And other categories such as insurance costs, car maintenance, and even food inflation remain stubbornly high. The market’s short-term reaction may be strong, but this is only one month’s data. This entire year has seen the market careen from one narrative to the next. While the October CPI data may help to soften the Fed’s trajectory a bit, it would take a lot more in coming months for the Fed to make an actual dovish pivot rather than stick to its ‘higher for longer’ recent messaging.”

KING LIP, CHIEF STRATEGIST, BAKER AVENUE ASSET MANAGEMENT, SAN FRANCISCO

“This is a big deal. This is finally some constructive developments on inflation.”

“We have been calling the peak of inflation for the last couple of months and just have been incredibly frustrating that it hasn’t shown up in the data. For the first time, it has actually shown up in the data.”

“This is a very positive development in the right direction. It may be still a little too early to say this is the end of the bear market. What Powell said is that we are going to need a few more reads on good CPI data before he can say we’re done.”

MIKE RIDDELL, SENIOR FIXED INCOME PORTFOLIO MANAGER, ALLIANZ GLOBAL INVESTORS, LONDON

“Positioning always gets very stretched when trends have been in place for a long time. Going into the US CPI data release, there has been a clear bias for global investors to continue running with the trades that have worked in the last 12 months, namely large short rates positions, underweight risk assets, and long the US Dollar. These positions are all related – aggressive central bank hikes this year, particularly from the Fed, have pushed US bond yields higher along with the US Dollar, and put pressure on risky assets.”

“The first major downwards surprise in US inflation for a while has forced a lot of the leveraged trend followers to stop each other out. The move lower in the US Dollar today is what would be expected given the rally in risk assets, based on correlations with bonds and risky assets over the last few months.”

“If US inflation continues to come in lower than expected, then the Fed, as well as other central banks, have leeway to pause with rate hikes. If economic growth continues to deteriorate further, then the Fed could be in a position to cut rates aggressively next year. A gentle switch into a cutting cycle would be the very worst outcome for the US Dollar.”

MIKE ZIGMONT, HEAD OF TRADING AND RESEARCH, HARVEST VOLATILITY MANAGEMENT,

“It’s very good news for future Fed policy and indicates that what the Fed has been doing has been appropriate.”

“It takes off the table the risk that the Fed will have to overtighten and break the economy.”

BRIAN JACOBSEN, SENIOR INVESTMENT STRATEGIST, ALLSPRING GLOBAL INVESTMENTS, MENOMONEE FALLS, WISCONSIN“Well, that was a relief. We’re getting some inflation relief. The run-rate for inflation is 4.8% annualized and that’s a material improvement from where we’ve been. Shelter is the main contributor to inflation and everyone should know by now that it’s a garbage indicator of where inflation is headed. The Fed knows it and it can throttle back rate hikes. Maybe that peak rate for the federal funds rate doesn’t have to be so high after all.”

LEE HARDMAN, CURRENCY STRATEGIST, MUFG, LONDON

“The CPI report has reinforced the selloff momentum in the dollar.”

“It gives the market more confidence that there could be a turn in the inflation cycle and the Fed could slow the rate hike pace in December.”

PAUL NOLTE, PORTFOLIO MANAGER, KINGSVIEW INVESTMENT MANAGEMENT, CHICAGO

    “The market thinks it’s wonderful. The focus here is really not so much on year over year. It’s the monthly stepdown. A lot of the areas that we’ve all looked at and said this is going to have an impact, are having an impact… a lot of those things are finally working their way into the numbers. And I think the expectation now is the Fed hikes rates 50 basis points in December. We were never in that camp, but expectations were for 75.”

ART HOGAN, CHIEF MARKET STRATEGIST, B. RILEY WEALTH, NEW YORK

“A softer than expected inflation report is acting as a tailwind for markets. Every line of the report shows sequential improvement.”“The good news is that we saw a significant sequential improvement, inflation is clearly moving in the right direction. And that keeps a more hawkish Fed at bay.”

“We came into this week nervous about the elections but we can check that box now, we know we’ll have at least some gridlock in Washington. Next, we immediately turned our attention to the CPI and that clearly came in better than expected. The only potential headwind here has been the significant selloff in cryptocurrencies and that seems to have stabilized a bit morning too.”

“Also important is the initial jobless claims came in higher than expected, so we’re finally starting to see some of those layoffs announcements by tech companies filter into the weekly data.”

PETER CARDILLO, CHIEF MARKET ECONOMIST, SPARTAN CAPITAL SECURITIES, NEW YORK

“The key is the core rate. This numbers to peaking inflation and as you can see stock (futures) are responding in a big way.”

“This is good news and if it keeps up, we will be near a pause by the Fed. This is welcome news.”

“The hikes in interest rates are beginning to bite into the economy and lower inflation as consumers become more frugal.”

“There’s a possibility the Fed raises (interest rates) by 50 basis points in December and then takes a pause.”

RYAN DETRICK, CHIEF MARKET STRATEGIST, CARSON GROUP, OMAHA

“Today’s date is a big relief. We’ve seen signs that inflation was starting to roll over – used car prices, rents have been coming down. But it’s nice to see confirmation in the government data, which is what we’ve seen today.”

“This does open the door to a likely 50 basis point hike in December, calming some of the Feds extremely hawkish stance that it had on inflation so far this year.”

ROBERT PAVLIK, SENIOR PORTFOLIO MANAGER, DAKOTA WEALTH, FAIRFIELD, CONNECTICUT

“It’s a good sign for the Fed. The data is surprisingly better than expected. It rocketed the futures higher and then to top it off, weekly initial unemployment claims came in higher than expected. So it’s all moving in the direction that the Fed wants it to.”

“Given just this data, it would allow the Fed to raise by only 50 basis points rather than 75 at the next meeting.

I don’t think they would go any lower than that.”

(Compiled by the Global Finance & Markets Breaking News team)