In the United States, inflation begins to slow down

It seems inflation is finally losing momentum in the United States. Last Friday, the consumer price index (CPI) for October came in below the consensus. While analysts were expecting an annualised increase of 7.9%, the actual figure stalled at 7.7%. The CPI has jumped 8.2% in September. The Core CPI, which excludes food and energy, also came in lower than the expected 6.6% at 6.3%. Yes, inflation remains high far above the Fed’s target, but it’s a reversal in the trend that is great news for investors: with one exception, inflation had surpassed projections since the beginning of the year. It may just be that the increase in the CPI peaked in July at 9.1%. The figures were made public one week after the Fed hiked rates by 0.75% for the fourth consecutive time. At the time of the first rate hike in March this year, inflation was already well entrenched at 7.9%, compared to 1.7% a year earlier. Since, the Fed has increased rates by 350 basis points to arrive at an upper end of 4% currently for the target bracket. It’s the highest level since December 2007. But Fed Vice Chair Lael Brainard said on Monday that she thinks ‘it will probably be appropriate soon to move to a slower pace of rate increases...we’re finally starting to see goods inflation starting to turn over’. The next Fed meeting will take place on 14 December and at the moment the market is leaning towards a 50 point increase rather than a 75 point increase.

Yesterday, both producer and consumer prices were down and below the consensus. But manufacturing activity in the New York are is growing again, which is ironic when rate hikes are supposed to dampen economic activity. In any case, the financial markets have gone risk-on. The weaker-than-expected CPI caused an immediate reaction which continued thereafter. The S&P 500 gained 100 points in the first minute after the index was released. Supported by the decline in inflation, Wall Street had its best week since June. The market is hoping that the Fed will slow down the pace of rate hikes sooner than expected (the so-called ‘pivot’). Precious metals and government bonds also made significant gains, while the US dollar fell rapidly. The EURUSD – which was at parity last week and around 0.9750 at the beginning of the month – has risen to 1.0481, not far from its 200-day moving average. The USDJPY had recently reached a multi-decade high of almost ¥152 to the dollar. It stood at ¥148 just before the consumer price release, and now it’s down to ¥139 to the dollar. Since the end of 2021 the dollar has benefited from its safe haven status, poor growth prospects in Europe and a favourable interest rate spread. The latter factor may now have less impact, as the market believes that the Fed may stop raising rates in the first quarter of 2023. The greenback is therefore likely to enter a phase of increased volatility, and the last few days seem to confirm that. Last night two missiles struck a village inside the territory of Poland, a NATO member country, killing two people. The euro fell sharply against the dollar and the Swiss franc before recovering when the G20 and NATO suggested that they would not treat the missile explosion as a Russian attack.

Thomas Jordan, President of the Swiss National Bank, sees a high probability of a further rate hike in December at the SNB’s next meeting. Continued high inflation supports the argument for a rise, he said, adding that the strong franc is helping to keep inflation in check. So the SNB remains ready to buy or sell the franc to keep the currency at an appropriate level and simultaneously fight inflation. The Swiss franc has strengthened in recent days: while it was hovering around parity against the euro and the dollar, it is now trading at 0.98 against the single currency and 0.94 against the greenback, benefiting even more from its weakness. Next year, the Swiss economy is expected to grow by less than 2022. This year, experts believe that growth will be around 2%.

In China, exports fell in October year-on-year for the first time since 2020, hampered by the country’s health restrictions and fears of a further slowdown in the global economy, which also hurt imports. The Chinese authorities have reaffirmed their commitment to their zero-COVID policy but have also eased some restrictions, which has benefited Chinese stocks in recent days.