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The US stock indices skyrocketed yesterday thanks to a long-awaited US inflation slowdown. The US Consumer Price Index fell from 8.2% to 7.9% year-over-year (8.0% expected). Core inflation, which excludes food and energy, also declined from 6.6% to 6.3% (6.5% expected). The decline in inflation indicates that the peak of inflation is likely to be over, which means the US Fed can reduce the pace of interest rate hikes so as not to put additional pressure on the economy. The probability of a 0.5% rate hike in December rose to 81% (vs. 56% the day before). As the stock market closed, the Dow Jones Index (US30) increased by 3.70%, and the S&P 500 Index (US500) jumped by 5.54%. The Technology Index Nasdaq (US100) was up yesterday by a record increase of 7.35% in 1 day. Near the end of this difficult year, investors are starting to see the light at the end of the tunnel and a chance for a moderate pre-New Year's rally.

Given the prospect of a less hawkish Fed decision, Treasury yields have fallen sharply, and 2-year Treasury yields, sensitive to Fed policy, have fallen to a two-week low, helping big tech companies grow.

"The easing of core inflation in the October report is welcome news for the Fed," Morgan Stanley said in a note. But the bank warned that optimism about slowing inflation could be dispelled if incoming data show that labor markets remain tight.

Equity markets in Europe also rose yesterday. German DAX (DE30) gained 3.51%, French CAC 40 (FR40) increased by 1.96%, Spanish IBEX 35 (ES35) added 1.15%, and British FTSE 100 (UK100) closed yesterday with a 1.08% gain.

Joachim Nagel of the European Central Bank (ECB) Governing Council said on Thursday that the ECB still needs to act decisively to fight inflation, which requires additional interest rate increases. The politician also noted that monetary policy has a time lag, so it takes time for rates to work to their full potential. Today, analysts' attention is focused on German inflation data.

There was a broad rally in commodities markets Thursday as the dollar index fell sharply, posting its biggest daily drop in 11 years. But the oil market reacted more or less calmly. The relatively modest rise in oil was triggered by continuing news of a rise in the incidence of Covid in China. New cases of the coronavirus have broken out in the export capital of China's Guangdong province, raising fears that the severe restrictions imposed in Shanghai earlier this year may be in the area. For the oil market, the damage from China's lockdowns far outweighed the benefits of any Fed rate easing. But after news of the lifting of restrictions in Hong Kong, oil prices have been showing gains since the market opened.

The price of gold rose to its highest level in 3 months. Gold is inversely correlated to the dollar index and US government bond yields, so a sharp decline in the dollar index contributed to the rise in precious metal prices.

Asian markets were mostly down yesterday. Japan's Nikkei 225 (JP225) decreased by 0.98%, Hong Kong's Hang Seng (HK50) ended down by 1.70%, while Australia's S&P/ASX 200 (AU200) fell by 0.50%. But Asian stocks opened sharply higher on Friday as the Hong Kong government eased some restrictions related to COVID, encouraging optimism for a broader lifting of restrictions. Hong Kong's Hang Seng (HK50) is already up more than 6% from the market opening. Analysts at Goldman Sachs predict that Chinese stocks could rise 20% when the country eventually waives COVID-19 and that it could do so by mid-2023.

• S&P 500 (F) (US500) 3,956.37 +207.80 (+5.54%)
• Dow Jones (US30) 33,715.37 +1,201.43 (+3.70%)
• DAX (DE40) 14,146.09 +479.77 (+3.51%)
• FTSE 100 (UK100) 7,375.34 +79.09 (+1.08%)
• USD Index 107.93 -2.64 (-2.39%)

Important events for today:

• UK GDP (q/q) at 09:00 (GMT+2);
• UK Industrial Production (m/m) at 09:00 (GMT+2);
• UK Manufacturing Production (m/m) at 09:00 (GMT+2);
• Eurozone German Consumer Price Index (m/m) at 09:00 (GMT+2);
• Eurozone Economic Forecasts (m/m) at 12:00 (GMT+2);
• Switzerland SNB Chairman Jordan speaks at 14:45 (GMT+2);
• US Michigan Consumer Sentiment (m/m) at 17:00 (GMT+2).

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