U.S. CPI Gives Financial Markets a Breather

U.S. Consumer Price Index (CPI) slid from 3.7% in September to 3.2% in October. Another significant measure, the core inflation, which excludes more volatile elements such as energy and food, remained stickier with the year-on-year percent change falling from 4.1% in September to 4.0% in October. That said, we should remember that inflation had reached a high of over 40 years at 9.1% (all items) last year in June. Sixteen months later, data released this week has fuelled optimism that Federal Reserve’s rate hikes are now off the table, despite the hawkish tone of some central bankers.

Added to this, weekly jobless claims rose while retail sales fell for the first time in seven months in October, pointing to slowing demand in the U.S. at the start of the fourth quarter which reinforces disinflationary pressures.

Stocks surged and Treasury yields plunged on the news as inflation directly influences Fed’s interest rate decisions.

The yield on the 10-year Treasury yield lost 21 basis points to 4.44% from 4.65%. The three major U.S. stock indexes notched a third-straight weekly win. The Dow Jones Industrial Average jumped 664.18 points for the week, or 1.94%, to 34,947.28. The S&P 500 gained 2.24% to 4,514.02. The Nasdaq Composite added 2.37%. Small cap stocks did even better with the Russell 2000 up 5.42%.

European indexes followed suit with the MSCI EMU rising by 3.33%. Annual inflation in the euro zone also slowed significantly, down from 4.3 % in September to 2.9 % in October. In the U.K., the FTSE 100 rose 1.95%. U.K. CPI plunged to 4.6% on an annual basis in October, from 6.7% in September, data showed earlier this week.

In Asia, Japan’s Nikkei climbed 3.12%. Bank of Japan Governor Kazuo Ueda stressed on the need to maintain ultra-loose monetary policy, presenting little near-term relief for the yen. China’s Shanghai Composite edged up 0.51%. The Chinese stock market continues to be largely ignored by foreign investors.

Strong rebound for the sectors most battered this year

All S&P sectors finished the week in the green, but some struggled to stay above the flat line. Consumer staples edged up 0.57% as U.S. consumer sentiment darkens ahead of the key holiday shopping season. The energy sector managed to erase the losses suffered on Thursday to close Friday with a weekly gain of 0.88%, despite a bigger-than-expected rise in U.S. crude inventories and record production in the world's biggest producer, along with mounting worries about lacklustre demand in Asia.

By contrast, other sectors hardest hit this year rallied strongly, especially those sensitive to interest rates. Thus, the real estate sector posted the best performance of the week with a 4.46% jump. Materials also gained ascendancy (+3.68%) after twelve negative weeks since the beginning of August. Ditto for the financial sector (+3.26%) as falling Treasury yields also allow to reduce default risk. Even the worst performer since the start of the year – utilities - has benefited from the buying momentum (up 2.97% for the week but down 12.2% year-to-date).

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