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The US dollar index fell and stocks rose higher on Tuesday following a positive inflation report for October.

The US dollar index fell by roughly 1% on Tuesday following cooler-than-expected inflation data for October. The annual inflation rate of 3.2% was lower than economists’ projections and marked a notable drop from September’s 3.7%. The report acted as a catalyst for US equities, with all major indices seeing noteworthy gains at the opening bell. 
 

Core CPI Lowest in Two Years

The most recent Consumer Price Index (CPI) report for October released on Tuesday offered a promising signal for the US economy, with inflation remaining flat compared to the previous month.

Notably, the annual inflation rate stood at 3.2% last month, below the consensus estimates of 3.3% and significantly lower than the 3.7% reported for September. Month-on-month, the CPI showed no change, indicating a flat inflation rate. This contrasts with the 0.4% increase observed in September.

Excluding volatile food and energy prices, core CPI increased by 0.2% in October, slightly below the forecasted 0.3%. The annual core CPI, stood at 4%, marking the lowest level in two years, although it is still well above the Federal Reserve’s 2% target.

In terms of the market’s reaction, it was largely as expected. The US dollar index fell nearly 1% to 104.64, the lowest in almost two months. The yield on the 10-year Treasury fell by 0.18 to 4.44%, while the 30-year yield slipped 0.13 to 4.61%.

Stocks soared higher at the opening bell, with the S&P 500 adding 1.44%, Dow Jones climbing 1.1%, and the tech-oriented Nasdaq-100 advancing over 1.6%. 
 

Can the US Economy Stage a ‘Soft Landing?’

The latest CPI data came as markets closely monitor the Fed’s next steps in a 1.5-year battle against inflation. Since March 2022, the US central bank raised the key borrowing rate 11 times to the highest level since early 2001. 

Although markets hoped for a halt in monetary policy tightening, late data presented conflicting signals. 

October’s nonfarm payrolls rose by a modest 150,000, suggesting the labor market is responding to the Fed’s efforts to address supply-demand imbalances fueling inflation. Also, labor costs have grown more slowly amid increased productivity over the past 18 months. 

Meanwhile, the gross domestic product (GDP) surged at a 4.9% annualized pace in Q3, but economists anticipate a considerable slowdown in the growth rate. On the other hand, different indicators show that consumer inflation expectations are still rising, likely resulting from increased gas prices and uncertainty caused by the wars in Ukraine and Gaza.

At the same time, the possibility of rate cuts in 2024 persists. This, coupled with the prevailing optimism that the US will sidestep a recession, paints a narrative of a potential soft landing for the economy.

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