Good sign for Aussies as US inflation drops, stocks surge

Inflation in the US has dropped causing stocks to rally, and it’s good news for Australians.

Annual inflation in the US has slowed to 7.7 per cent, the lowest level since January and below analyst expectations.

Wall Street stocks surged after the news, with the Dow ending 3.7 per cent higher with a nearly 1200-point jump. The broader S&P 500 jumped 5.5 per cent and the tech-heavy Nasdaq Composite index soared 7.4 per cent.

Peter Cardillo of Spartan Capital Securities told AFP: “I don’t recall having ever seeing the Nasdaq being up seven per cent ever (and) I’ve been watching the markets for over 50 years.”

Josh Gilbert, financial market analyst at eToro, told news.com.au the inflation news was a good sign for Australia in terms of the Reserve Bank of Australia’s plan to rise interest rates to slow inflation here.

“The RBA will, of course, focus on local data for their decisions, but this reading will provide some relief to the board that rate hikes in the US are having the desired effect,” he said.

“Although I don’t think this changes the RBA’s course, given they have already shifted to lower hikes. If anything, it will likely reinforce that the board made the right decision in slowing down.”

US stocks surged after the inflation revelation. Picture: Michael M. Santiago/Getty Images/AFP

Australian inflation is likely a six month lag to the US, Mr Gilbert said.

Dr Shane Oliver, chief economist at AMP, also believes this, recently writing that it means Australia’s inflation should start to decline early next year.

Australian business and financial commentator Peter Switzer said the US inflation revelation brought good news for the stock market and suggested we could end this year in positive territory.

“But the good news doesn’t stop there. For those very worried about interest rate rises, this is a good step to slow down the Fed’s big 0.75% rate rises, and that could also help our RBA to start easing up soon as well,” he wrote on Friday.

“The bond market is the predictor of where rates are going and yields — effectively, interest rates — fell overnight.”

Stocks rally after US inflation slows

The US consumer price index, a key measure of inflation, rose at an annual pace of 7.7 per cent in October, it was announced on Thursday.

That’s a drop from the 8.2 per cent rate recorded in September.

It was good news for the stock market with AvaTrade analyst Naeem Aslam saying inflation has started to “drop like a rock” and that was “the best news that anyone can expect”.

He expects that the Fed will still continue with rate hikes, though at a slower pace.

The Fed’s benchmark lending rate currently stands at between 3.75 to 4.0 per cent, the highest since January 2008.

Investors have been keenly watching for signs that Fed policymakers will pivot away from their aggressive 0.75 percentage point hikes or pause them altogether.

US Federal Reserve Bank board chairman Jerome Powell announcing the sixth interest rate increase this year on November 2. Picture: Chip Somodevilla/Getty Images/AFP

The Fed has raised the benchmark lending rate six times this year, including four consecutive giant rate hikes, despite fears it could trigger a recession.

Matt Weller at StoneX said that after the softer inflation reading, traders are now pricing in an 80 per cent chance that the Fed will shift down to a 0.50 percentage point interest rate hike and now see rates peaking below 5.0 per cent.

“There’s optimism that the worst of the selling may be behind us,” on equity markets, which are down heavily this year.

President Joe Biden welcomed the CPI data, saying it showed “a much-needed break in inflation at the grocery store as we head into the holidays.”

Stay up to date with the latest market moves with Flash. 25+ news channels in 1 place. New to Flash? Try 1 month free. Offer available for a limited time only >

The S&P500 soared by 4.5 per cent. Picture: Bloomberg

But he cautioned in a statement that it will “take time to get inflation back to normal levels,” with potential setbacks along the way, and vowed to keep helping households with living costs.

Fed Chair Jerome Powell last week said it was premature to consider pausing the hikes, but there is a growing chorus of voices, including some Fed officials, advocating for smaller steps in coming months.

Dallas Fed President Lorie Logan said Thursday that she believes “it may soon be appropriate to slow the pace of rate increases” so policymakers can assess how conditions are changing.

But she warned that “a slower pace should not be taken to represent easier policy.”

Another official, Cleveland Fed President Loretta Mester, added in separate remarks that inflation remains persistent and monetary policy needs to become restrictive and stay that way for some time.

– with AFP