US inflation in October, which was released on Tuesday, was lower than expected, boosting hopes that the Fed may be done with interest rate hikes.

The US consumer price index (CPI) climbed 3.2% year-on-year in October, down from 3.7% in September and below the market estimate of 3.3%.

Core CPI, which excludes food and energy, showed a more modest decline, dropping to 4.0% year-on year in October. This was down from 4.1% in September and below the estimate of 4.1%.

On a monthly basis, CPI came in at 0.0%, down from 0.4% in September and below the market estimate of 0.1%. This is the first time that CPI has been flat in fifteen months. Core CPI dipped to 0.2%, down from 0.3% which was also the market estimate. The drop in gasoline prices helped lower CPI, and a slower rise in housing prices and rentals pushed core CPI lower.

Is the Federal Reserve’s rate-tightening cycle finally over? The markets certainly think so and have priced in a pause at the Fed’s December meeting and a rate cut in mid-2024, perhaps as early as May. The Fed, however, is still trying to push back against expectations for a rate cut, especially with inflation well above the 2% target.

Fed Chair Powell said last week that “if it becomes appropriate to tighten policy further we will not hesitate to do so”, but the weaker-than-expected October inflation report gives the Fed less reason to raise rates and the markets aren’t likely to pay attention to Powell’s hawkish rhetoric. US Treasury yields remains high, which is also helping to push inflation lower without the Fed having to raise rates.

US Dollar Sinks, Stock Markets Rally After Inflation Report

The inflation report triggered a strong reaction on the currency and equity markets, as expectations rose that the Fed’s rate-tightening cycle is over.

The US dollar declined sharply against all the major currencies on Tuesday. The big winner was the AUD/USD currency pair which surged 2.04%. The GBP/USD currency pair climbed 1.79% while the EUR/USD currency pair rose 1.68%.The US dollar has stabilized and is slightly higher against the majors on Wednesday. 

US stock exchanges soared on Tuesday. The S&P 500 Index climbed 84.15 points (1.91%) to close at 4,495.70, its best one-day showing since April.

The Nasdaq 100 Index surged by 329.69 points (+2.13%) to close at 15,812.47.

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