Dollar tumbles on cooler-than-expected US inflation

US CPI numbers support ‘Fed is done’ narrative

The dollar tumbled across the board yesterday after cooler than expected US inflation data added more credence to investors’ belief that the Fed’s tightening crusade is over, despite Chair Powell and his colleagues pushing back against such expectations recently.

The headline CPI rate dropped to 3.2% y/y from 3.7%, while the core rate ticked down to 4.0% y/y from 4.1%, with the forecasts being just a decimal higher. Alongside the dollar, Treasury yields also slipped, with the 10-year rate sliding around 20bps, while according to the Fed funds futures, the probability for another Fed hike has dropped to zero. Meanwhile, investors are now penciling in nearly 100bps worth of rate cuts for next year, with an 80% probability for the first one to be delivered in May.

Today, the focus for dollar traders is likely to turn to the PPI and retail sales figures for October, as well as a speech by Richmond Fed President Thomas Barkin. They may be interested to see whether the data will paint a different picture than the CPIs and what Barkin will have to say after yesterday’s release.

Higher-than-expected PPI and retail sales numbers could revive speculation that inflation could prove somewhat stickier in the months to come and even if investors are not willing to put hike bets back on the table, they may remove some basis points worth of rate reductions for next year. This could help the dollar recover a portion of the heavy losses it posted yesterday. On the other hand, should today’s data also disappoint, the greenback’s wounds may deepen.

Aussie and kiwi the big winners, pound pulls back

The main gainers were the risk-linked aussie and kiwi as the slowdown in US inflation did not only hurt the dollar, but also bolstered risk appetite. Those currencies are extending their gains today as Chinese industrial production and retail sales fared better than expected in October, even though fixed-asset investment, and the battered property sector disappointed.

On top of that, the People’s Bank of China (PBoC) boosted liquidity injections through its medium-term lending facility (MLF) today. Although the rate was left unchanged, the Bank made more fresh loans than the ones maturing, allowing a net of 600bn yuan to float into the banking system. This marks the largest injection since December 2016 and may have added to hopes that better days may come sooner than previously expected for the world’s second-largest economy.

The pound secured third place yesterday, with Cable emerging above its 200-day moving average, but today it is pulling slightly back as the UK CPI rates also slid by more than expected, prompting investors to allow a less than 10% probability for another quarter-point hike by the BoE and fully price in a cut of the same size in June. The next test for the British currency may be Friday’s UK retail sales data for October.

Equities skyrocket on soft US inflation numbers

Stock markets soared yesterday after the soft US CPI data validated investors’ view that the era of interest rate rises is over, with the tech-heavy Nasdaq gaining more than 2%.

With most high-growth tech firms being valued by discounting expected free cash flows for the quarters and years ahead, expectations of no more hikes and more rate cuts for next year are elevating their present values, despite most of them being considered expensive from a multiples’ perspective. Perhaps investors believe that the high prices are reflecting present values of future growth opportunities rather than expensiveness. With that in mind, the rally may continue today if the PPI and retail sales data corroborate the view of several rate reductions by December 2024.