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Market Update

Latest U.S. inflation reading spurs optimism in markets

Date:
November 14, 2022
  • Scott Balta headshot

    Authors

    Scott Balta

    Associate

    Corporates | Kennett Square, PA

Summary

The latest U.S. CPI reading came in lower than economists expected last Thursday, leading to a big rally in equities and overshadowing the market impact of midterm elections. The U.S. dollar fell sharply in response to the news.

Inflation data

The U.S. CPI reading for October came in at 0.4% MOM and 7.7% YOY, lower than the expected 0.7% and 8.0%, respectively. Core CPI, which excludes food and energy costs, increased by 0.3% MOM and 6.3% YOY. While these readings are still at historically high levels and far above the Fed’s long-term target of 2.0% YOY, markets interpreted them as further evidence that inflation has peaked and is now trending downwards.

Given that the impact of rate hikes on inflation usually comes at a significant lag, there is good reason to forecast additional cooling in inflation going forward, as the Fed has continued to aggressively hike rates through its most recent meeting. Treasury rates fell sharply following the inflation reading on expectations that the Fed might take on a more dovish outlook at its December policy meeting and beyond.

U.S. dollar plummets

The U.S. dollar strength index suffered its greatest daily loss since 2009 on Thursday, following the promising CPI reading. While low inflation is generally good for a currency’s strength, markets are anticipating looser monetary policy in wake of the reading and the rising rate environment has been a primary driver of the dollar’s strength to date.

Despite the decline, the dollar is still much stronger than it was during 2020 and 2021. For companies with predominantly USD expenses and foreign revenues, dollar strength has been a significant threat to margins over the past twelve months. By contrast, companies with the reverse profile may begin to see FX related losses if the dollar reverts to more ordinary levels.

(Related insight: Read “Managing FX risk in a strong U.S. dollar environment”)

Equity and commodity markets rally

Equity markets rallied in response to the apparent cooling in inflation, recording their best week since June 2022. The S&P 500 was up more than 4% on Friday, having entered the week only slightly above its 52-week low. Meanwhile, oil prices rose on Friday in response to news that China would ease some of its COVID lockdowns, helping to improve expectations for overall macroeconomic demand. The possibility of a more dovish monetary policy in the United States, in response to cooling inflation, also lent some upward pressure to commodity prices.

The week ahead

On the docket for next week is a collection of manufacturing, retail, and housing data, which will offer insight into the overall macroeconomic health of the U.S. economy.

(Related insight: Download our new quantitative benchmark report, "The state of financial risk management.")

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About the author


Disclaimers

Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit chathamfinancial.com/legal-notices.

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