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US stocks and bonds surged after recent data revealed that underlying price pressures in the largest economy in the world were easing more than anticipated. This led investors to speculate on quicker interest rate cuts later this year.
Information from the Bureau of Labor Statistics showed that annual headline inflation increased in December as expected to 2.9 per cent from 2.7 per cent in November. However, core inflation, which excludes volatile food and energy costs, unexpectedly dropped to 3.2 per cent from 3.3 per cent the previous month.
Following the release of the data, US equities and Treasuries saw gains. Markets had experienced a dip in recent weeks as investors adjusted their expectations of Federal Reserve rate cuts in anticipation of the economic policy of president-elect Donald Trump, which some fear may lead to inflation.
“Today’s CPI should lift the markets, easing concerns that the US is entering a second wave of inflation,” stated Seema Shah, chief global strategist at Principal Asset Management.
Stocks and government bonds saw significant rallies after the inflation data was released. The S&P 500 rose by 1.6 per cent in morning trading, while the Nasdaq Composite surged by 2.2 per cent. These gains positioned stocks for their best performance since November 6, following Trump’s presidential victory.
The two-year Treasury yield, which closely reflects interest rate expectations, fell by 0.08 percentage points to 4.28 per cent, while the 10-year yield, a global benchmark for borrowing costs, dropped by 0.13 percentage points to 4.66 per cent. Yields decline as prices rise.
The dollar index against six major currencies decreased by 0.4 per cent.
As of Wednesday morning, investors were predicting that the Fed would implement its first quarter-point rate cut in July this year, compared to September prior to the data release.
Fed officials have indicated a cautious approach to rate cuts due to concerns that inflation may not quickly reach the central bank’s 2 per cent target.
Mark Cabana, head of US rates strategy at Bank of America, suggested that the inflation figures, particularly the core figure, are likely to slightly boost the Fed’s confidence in a continued decline in inflation. However, policymakers may still be disappointed with the slower progress in addressing inflation.
Most investors and analysts believe that the Fed will not lower rates at its upcoming policy meeting later this month. US central bankers have projected only a 50 basis point rate cut for the year.
With Trump’s inauguration approaching, there are concerns that his plans to impose tariffs, tighten immigration policies, and implement significant tax cuts could further elevate inflation.
David Kelly, chief global strategist at JPMorgan Asset Management, highlighted the uncertainty surrounding inflation this year and the potential impact of new policies on tariffs, immigration, and fiscal matters.