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US stocks and bonds rallied after data published on Wednesday showed underlying price pressures in the world’s largest economy easing more than expected, prompting investors to bet on swifter interest rate cuts this year.
The figures from the Bureau of Labor Statistics indicated that headline annual inflation rose in line with expectations to 2.9 per cent in December from 2.7 per cent in November.
But core inflation, which strips out volatile food and energy costs, fell unexpectedly to 3.2 per cent from 3.3 per cent a month before.
US equities and Treasuries gained after the data release. Markets had dipped in recent weeks as investors scaled back expectations of Federal Reserve rate cuts in anticipation of president-elect Donald Trump’s economic policy, which some fear will be inflationary.
“Today’s CPI should provide a boost to markets, relieving some of the anxiety that the US is at the beginning stages of a second inflation wave,” said Seema Shah, chief global strategist at Principal Asset Management.
Stocks and government bonds rallied sharply following Wednesday’s inflation data.
The S&P 500 jumped 1.4 per cent at the open, while the tech-heavy Nasdaq Composite leapt 1.8 per cent.
The policy-sensitive two-year Treasury yield, which closely tracks interest rate expectations, lost 0.1 percentage point to trade at 4.26 per cent, while the 10-year yield — a benchmark for global borrowing costs — tumbled 0.13 percentage points to 4.66 per cent. Yields fall as prices rise.
A gauge of the dollar against six peers fell 0.6 per cent.
As of Wednesday morning, investors were betting that the Fed would cut rates by July, compared with September before the data was published. The probability of a second cut this year implied by futures markets climbed to roughly 60 per cent from about 20 per cent earlier on Wednesday.
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Fed officials have signalled that they plan to take a “careful approach” to rate cuts amid concerns that inflation may not quickly come down to the central bank’s 2 per cent target.
Mark Cabana, head of US rates strategy at Bank of America, said that the inflation figures, notably the core figure, were likely to “modestly increase” the Fed’s “confidence that inflation will continue to fall”. But he added that policymakers were probably “still overall frustrated with the slowdown in the pace of progress on the inflation front”.
Most investors and analysts believe the Fed will not lower rates again at its next policy meeting later this month. US central bankers have signalled in their own projections that they will only cut rates by a further 50 basis points this year.
Trump, who takes office on Monday, has laid out aggressive plans to impose tariffs on a vast swath of imports, implement a huge crackdown on undocumented immigrants and enact sweeping tax cuts.
Economists have warned such plans could boost inflation further.
“The real question mark around inflation this year isn’t around what the economy can do to inflation or what the trend is before the Trump administration takes over,” said David Kelly, chief global strategist at JPMorgan Asset Management. “It’s what will new policies on tariffs, immigration and fiscal policies mean for inflation?”
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