A fall in inflation numbers is a sentiment booster for the equity markets. While the US inflation is still high, far away from the Fed target of 2%, the pace of rate hikes is slowing down. The US Fed is, therefore, expected to hike rates by 50 bps in its December 14 FOMC meeting. The recent US CPI data for November shows the annual inflation is drifting downwards which led the markets to end the day’s session in green.
Latest Update: Federal Reserve raises rate by 50 basis points, seven of 19 officials seeing benchmark rates above 5.25% next year
“In great news for consumers, market participants and the Federal Reserve (the Fed), consumer price pressures cooled in November. The overall Consumer Price Index (CPI) released this morning climbed 7.1% from the same month a year ago compared to the anticipated 7.3% increase. While 7.1% is still quite high, this month’s report offers many bright spots, including the rising odds that the Fed may soften its hawkish position, offering relief to investors, consumers and corporations,” says José Torres, Senior Economist at Interactive Brokers.
On the day when US CPI data for November was released, the S&P 500 gained 0.73%, the Dow gained over 100 points, and the Nasdaq 100 gained 1.09% at the day’s close. US equity futures are, however, trading lower ahead of the US Fed rate hike decision to be announced at 2:00 p.m. on December 14.
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“This definitely sets the ball rolling for Fed to consider and deviate from the super aggressive rate hikes to mild/status quo policy actions to bring down the inflation. US’s Central bank is widely expected to hike rates by 50bps tomorrow, which would signal a step down from four consecutive hikes of 75bps,” says Dhawal Ghanshyam Dhanani, Fund Manager, (Foreign Funds), Samco Mutual Fund.
The November CPI data is helping investors to believe that Fed Chairman Jerome Powell will announce today that the Fed is hiking rates by 50 basis points, with the next two hikes expected to be 25 bps, indicating a less hawkish stance on inflation. “The news regarding moderating inflation and the subsequent decline in bond yields and the equity market rally illustrates how improving optimism about the economy and the potential for the Fed to ease off its aggressive monetary policy tightening has helped loosen financial conditions,” adds Torres.
Also Read: Will US stocks surge and dollar, bond yields dip after the Fed rate hike today?
Fed Chair Powell in the conference today is expected to allay investors’ concerns about tightening financial conditions and yet leave something for them on the table. The upcoming jobs and retail data will throw more light on the impact of Fed rate hikes amidst the unprecedented rate hikes seen in 2022.