U.S. inflation experienced in October a larger-than-anticipated decline, reaching 3.2 percent. This marked the first decrease in four months, resulting in a significant decrease in Treasury yields and a notable surge in U.S. stock futures.
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The consumer price data shows a comparison to a 3.7 percent increase in the year leading up to September. The recorded figure of 3.2 percent is slightly lower than the projected forecast of 3.3 percent.
The yields on the two-year Treasury note, which is sensitive to interest rate changes and moves in the opposite direction to prices, experienced a decrease of 0.13 percentage points, settling at 4.9 percent. Similarly, the yields on the 10-year Treasury note, considered as a benchmark, also dropped by 0.14 percentage points, reaching 4.48 percent.
Futures tied to the S&P 500 index, which is considered a benchmark for Wall Street, increased by 1.3 percent. Additionally, futures linked to the Nasdaq 100 index, known for its technology-heavy composition, rose by 1.6 percent.
The dollar declined by 0.8 percent when measured against a basket comprising six other major currencies.
Earlier this month, the Federal Reserve (Fed) maintained its benchmark interest rate at a 22-year high, signaling stability. As inflation started to take hold, investors grew more assured that interest rates had reached their peak.
The underlying inflation, which excludes the volatile prices of food and energy, was slightly lower than anticipated, declining from 4.1 percent to 4.0 percent on a year-on-year basis. Additionally, core inflation experienced a monthly increase of 0.2 percent.
Monetary tightening
Last week, Fed Chair Jerome Powell emphasized that policymakers would not base their decisions solely on short-term data. He highlighted that the Central Bank could consider tightening monetary policy if needed, but there was no immediate intention among officials to raise interest rates beyond the existing range of 5.25-5.5 percent.
Concerns were raised that a potential deceleration in inflation could be hindered by stronger-than-anticipated GDP growth. However, Powell reassured last week that he and his colleagues anticipated a reduction in the pace of economic expansion.
Instead of implementing another rate hike, there is a growing expectation that the Fed might adjust the timeline for a more substantial rate cut in 2024 if consumer prices persistently remain elevated.
Decision criticized
In a different context, U.S. Treasury Secretary Janet Yellen expressed criticism towards Moody’s decision to downgrade its outlook for the U.S. economy based on debt concerns. Yellen argued that the U.S. economy remained robust and highlighted the safety and liquidity of the Treasury bond market.
“This is a decision I disagree with,” she said at a news conference at the close of the APEC Finance Ministers’ Meeting in San Francisco, California.
Downgrade
On Friday, credit rating agency Moody’s revised its outlook for the U.S. credit rating from “stable” to “negative.” The downgrade was attributed to concerns over a significant fiscal deficit and the perceived lack of debt sustainability.
Yellen recognized that the persistent increase in long-term interest rates could pose a challenge to debt sustainability. However, the Biden administration is “completely committed to a credible and sustainable fiscal path,” she said, citing plans to reduce the deficit and investments in the Internal Revenue Service, which collects taxes.
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