World stocks experienced a significant surge on Tuesday following the release of U.S. inflation data, which came in cooler than expected for the month of October. This data has fueled investor speculation that the era of rising interest rates may be coming to an end, and that borrowing costs could potentially start to decrease in the near future.
The latest figures show that U.S. consumer prices remained unchanged in October, with a decline in gasoline prices offsetting any increase. Meanwhile, underlying inflation displayed signs of slowing. When excluding the volatile food and energy components, the Consumer Price Index (CPI) increased by 0.2%, largely due to a rise in rental housing costs. This figure fell short of the 0.3% gain that analysts had predicted.
As a result of this news, the MSCI World Equity index saw a significant surge of 1.9% by the end of the trading session in New York. This rally was not limited to global stocks, as Wall Street also experienced a boost. The S&P 500 index leaped 1.9%, the Dow Jones Industrial Average jumped 1.4%, and the Nasdaq Composite Index had its best day since April 27, advancing 2.4%.
Brian Jacobsen, the chief economist at Annex Wealth Management in Wisconsin, expressed his belief that this could mark the end of the era of rate hikes. He further stated that investors will now focus on predicting when the U.S. Federal Reserve, led by Chair Jerome Powell, may initiate rate cuts. Jacobsen drew a parallel to the “soft landing” of 1994-1995, where a pause in rate hikes lasted for five months.
Powell and other policymakers had previously expressed uncertainty regarding whether interest rates were high enough to control inflation. However, the latest U.S. inflation data has prompted expectations that rates may have peaked, causing Treasury yields to drop. U.S. two-year yields, which are an indicator of interest rate expectations, reached two-week lows with a significant one-day drop not seen since May 4. The benchmark 10-year yield also fell to a low that had not been witnessed in nearly eight weeks.
The decrease in yields resulted in a decline of 1.47% in the U.S. dollar index, while a weaker dollar led to a 1.7% boost for the euro, reaching $1.08765. This also provided some relief for the yen, which has been consistently weak against the dollar. The yen slightly recovered from Monday’s low of 151.92 and hovered around 150.325. Frederik Ducrozet, macroeconomics chief at Pictet Wealth Management, predicts that the Bank of Japan will gradually move away from yield curve control and negative rate policy, but not in the immediate future. He also emphasized that the yen is likely to be influenced by any movement in the dollar.
Furthermore, euro zone government bond yields also experienced a decrease, with the benchmark 10-year German yield reaching 2.596%.
In October, the Israel-Hamas war made traders risk-averse. However, world stocks have recovered nearly 5% so far this month as investors speculate that major central banks have concluded their series of rate hikes.
Regarding the UK, official data released on Tuesday showed that wages grew at a slightly slower pace in the three months leading up to September. Wages had previously risen at a record pace, prompting the Bank of England to be on alert for inflation.
In the euro zone, a new estimate confirmed a marginal contraction in the economy for the third quarter. This further solidifies expectations of a technical recession if the fourth quarter also demonstrates weak performance. However, despite the economic contraction, employment in the region still rose.
Oil prices remained unchanged, erasing any gains made after the International Energy Agency (IEA) increased its demand growth forecasts. Brent crude futures stood at $82.47 a barrel, while WTI crude futures finished at $78.26.
Overall, the U.S. inflation data indicating cooler-than-expected figures has led to a surge in world stocks, as investors speculate that the era of rising interest rates may be coming to an end. This news has prompted a drop in Treasury yields and a decline in the U.S. dollar index. Market players are now turning their attention to predicting when the U.S. Federal Reserve may initiate rate cuts. In the UK, wages grew slightly less quickly in the three months to September, while the euro zone experienced a marginal contraction in its economy during the third quarter. Employment, however, continued to rise. Oil prices remained stable, despite earlier gains after the IEA raised its demand growth forecasts.
More detail via Yahoo Sports here… ( Image via Yahoo Sports )