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US inflation data sends shockwaves through financial markets
Yesterday, a new set of inflation data from the United States sent tremors through the financial markets, as it came in stronger than anticipated.
US inflation data sends shockwaves through financial markets
Yesterday, a new set of inflation data from the United States sent tremors through the financial markets, as it came in stronger than anticipated.
This development quashed any lingering hopes that the Federal Reserve might lower interest rates in the first half of this year. Following the release, the US 2-year yield soared past 4.60%, returning to levels seen before the Federal Reserve hinted at a possible pivot in December, a move that had previously indicated a 75bp rate cut this year. Similarly, the US 10-year yield rebounded to 4.30%.
The market's reaction was swift and stark, as the likelihood of a rate cut in March plummeted, with the odds for a May rate reduction dropping from 56% to approximately 40% in a single trading session. Now, the anticipation has shifted towards June, with a 75% chance being priced in for the first Federal Reserve cut. This marks a significant adjustment in market expectations, which at the beginning of the year had considered an 80% likelihood of a March rate cut.
Equity markets responded negatively to the news, with the S&P500 dropping by 1.37% from an all-time high, and the Nasdaq declining by 1.58%. Small caps, more vulnerable to financing costs, saw a nearly 4% reduction. Some market observers suggest that the data might just be a temporary deviation in the US disinflation trend, cautioning against an overreaction. However, the market, having been buoyed by exaggerated rate cut expectations, now seeks a more balanced position. Analysts believe it would be healthier for both the S&P500 and Nasdaq to consolidate and adjust from their recent gains, to avoid unsustainable valuations.
The future of rate cuts remains uncertain, with the specific timing potentially being decided by economic data as it becomes available. Recent indicators, such as the Atlanta Fed's GDP estimate printing a 3.4% growth for Q1, suggest a stronger-than-expected US economy, complicating the Federal Reserve's decision-making process.
In the currency markets, the US dollar index surged past its 100-day moving average, testing the 105 level. This was propelled by a renewed appreciation for the dollar, as expectations for an imminent Federal Reserve doveish pivot waned. Consequently, gold prices fell below $2000 per ounce, and currency pairs like EURUSD and USDJPY experienced significant movements.
Internationally, inflation reports from other countries brought mixed news. The United Kingdom's inflation for January did not increase as much as anticipated, despite strong jobs data. Conversely, Switzerland reported a surprising deceleration in consumer prices in January, with only a 1.3% rise year-on-year, making the Swiss case a point of envy among central bankers worldwide.
The financial analyst Ipek Ozkardeskaya from Swissquote Bank stressed the significant market adjustments following the US inflation data, highlighting its substantial impact on investor expectations and market dynamics.
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