Alternative Investment Report

Stock market soars as inflation comes in below expectations

Investors are smiling as the US inflation print for November came in at 7.1% this afternoon.

This beats even the most optimistic of analysts, with 7.3% the consensus forecast ahead of the announcement. It is the lowest level since December 2021. Inflation in October was 7.7%.

Stock market races upward

Stocks wasted no time in heading north. The S&P 500 was up close to 3% at the opening bell. Bonds were also enjoying themselves, the 10-year yield down 10 bps and the 2-year down 15 bps.

Last month saw a similar positive reaction when inflation came in cooler than anticipated in October, with inflation numbers continuing to push markets. The S&P spiked 4% when inflation of 7.7% was announced compared to 7.9% forecasted. Analysts forecasted that a CPI reading in line with expectations today would have caused a 0.8% S&P 500 gain.

This is hence the second month in a row with a positive inflation reading, following the pain of September.

Core inflation, which strips out energy and food costs, which are known to be more volatile, came in at 6% on an annual basis, down from 6.3% last month.

What happens interest rates now?

Tomorrow, the US central bank will raise interest rates by 0.5%. This is lower than the previous 0.75% raises and reflects hope that inflation, albeit high, is beginning to soften.

This will bring the mark up to between 4.25% and 4.5%. The Federal Open Committee will meet this week to discuss next steps, with many still resolute that rates need to go higher again to rein in inflation, despite today’s positive reading.

The Fed’s inflation target is 2%, which is a long way down from this latest reading of 7.1%. This is why the market still expects rates to rise deep into Q1 next year and possibly beyond.

Labour market remains strong

Another concern is the resilient labour market. This may sound like a good thing, but a boisterous labour market will mean inflation is stickier – it is sort of a bad news means good news situation. It is hard to imagine inflation really getting under control without unemployment jumping and growth suffering.  

Of course, most expect that to come in the near future. But for now, today’s CPI print of 7.1% is ahead of expectations, and while investors are nowhere near out of the woods yet, this is at least a small win – evident in the buoyant market reaction.

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