Wall Street traders and investors are taking it easy after learning that US inflation is gradually declining. US stocks were upbeat but the indices closed the session almost flat on the day when the latest inflation numbers got released. The year-on-year December CPI dropped to 6.5% from 7.7% in October, then to 7.1% in November.
“The report came out exactly as expected. A 3rd straight decline in core CPI, meaning that inflation is indeed slowing. These are encouraging signs. Things are getting better, and so all eyes are now on the Fed to see whether they take their foot off the gas and hike rates less aggressively. Many market participants are expecting the Fed to start cutting rates before the end of the year, but it may be a little too premature to reach that conclusion at this stage,” says Kavan Choksi, wealth consultant at KC Consulting.
What it means for the markets is that the US Fed may remain less aggressive in hiking rates as earlier hikes are seen to impact prices with a lag. “Given that inflation is seen to be meaningfully abated, Fed may look to enhance interest rates by 25bps during the February 01 meeting which signals the peaking of the interest rate cycle. This would certainly act as a steroid for investors across the globe given the increased probability for the Fed which is likely to turn dovish sometime in early 2023,” says Dhawal Ghanshyam Dhanani, Fund Manager, SAMCO MF.
Overall, global equities are upbeat and are expected to end the week on a positive note. Weakening US inflationary pressure and anticipations of more gradual interest rate increases are keeping US equities on a firm footing. “Sensibly, investors are already pricing in far more favourable conditions in 2023 and this new data will confirm their convictions. Sectors, such as tech, that have fallen during the Fed’s tightening will likely do the best in the recovery rally,” says Nigel Green, CEO, deVere Group, one of the world’s largest independent financial advisory, asset management and fintech organisations.
Also Read: US inflation cools down to 6.5%, markets upbeat after December CPI data release
However, there are concerns that could be keeping the markets play the waiting game.
Although muted corporate earnings are expected, the markets are interested to get a hang of the management’s outlook and the guidance ahead.
Also, markets may also look at the falling inflation from a different perspective – Fed may be concerned that easing financial conditions may further postpone the return of inflation to 2%.
And lastly, since October, markets have rallied and the worry is that as earnings become more important, a rise higher could be a ‘sell the news’ scenario.
Meanwhile, the next FOMC meeting of the US Fed is on January 31 – February 1 and the markets could be discounting a 25 basis points hike in rates. It will, however, be the Fed Chief Powell’s commentary during the press conference that will decide how less aggressive the Fed is now.
Also Read: US stocks outperform Indian equities by nearly 310 basis points CAGR over the last 10 years
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