That’s down from September, when it was 8.2 percent. Economists had expected a drop to 7.9 percent. Core inflation, which excludes volatile food and energy prices, rose 6.3 percent year-on-year, also slower than expected. This indicator is particularly important for central bankers when making interest rate decisions.
Investors reacted euphorically. Shortly after the figures were published, the leading German index, the Dax, shot up after being almost unchanged. In the evening it went out with a plus of 3.5 percent. The yield on ten-year US government bonds also fell below the four percent mark.
The leading US indices also gained significantly in value at the start of trading in New York. The leading index Dow Jones started 2.8 percent up. The broad S&P 500 rose 3.6 percent. The technology-heavy Nasdaq even shot up by five percent and temporarily expanded its gains as trading progressed.
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The cryptocurrencies, which have come under significant pressure in the past few days, have also recorded price gains again. Bitcoin, the largest digital currency, rose by around five percent to $17,478.
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Many investors are speculating that the US Federal Reserve could now soften its monetary policy course. “The direction is right, but the decline in the overall and core rate remains a tough thing,” said Bastian Hepperle from Hauck Aufhäuser Lampe Privatbank. “However, if inflation continues to fall, the Federal Reserve will soften its tone and slow its rate-hiking streak in December. The key interest rate peak is likely to be reached in spring 2023.”
On the futures markets, there is now an 80 percent chance that the US Federal Reserve will only raise interest rates by half a percentage point in December. Last week, it raised interest rates by 0.75 percentage points for the fourth time in a row. It is now in a range of 3.75 to four percent.
Fed Chair Jerome Powell promised further hikes. However, he signaled that the rate hikes could be smaller than before.
Economists warn against too much optimism
Market expert Mohamed El-Erian, who advises Allianz among others, believes that Thursday’s inflation data is a good sign that the Fed can stick to its strategy. In particular, the prices for housing costs increased somewhat less than expected. The inflation rate for food and used cars also fell.
However, economists warned against too much optimism. Diane Swonk, chief economist at management consultancy KPMG, expects the Fed to hike rates by 0.5 percentage points at its next meeting in mid-December. The inflation data is not “strong enough to allay the Fed’s concerns,” she clarified. At 7.7 percent, inflation is still well above the Fed’s 2 percent target.
At the most recent press conference in early November, Federal Reserve Chairman Powell emphasized that the central bankers would have to see several data points in a row that would confirm a clear downward trend in inflation. Only then could the Fed consider pausing interest rate hikes. It is also likely that the Fed will have to raise interest rates to a higher level than originally expected.
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Since then, analysts have been discussing the level at which the Fed could stop interest rate hikes. Jim Vogel, interest rate strategist at financial services firm FHN Financial, expects the Fed to raise interest rates to 6 percent to bring inflation under control. They were last this high in 2001, before the dot-com bubble burst. This could weigh significantly more heavily on the stock and bond markets than has been priced in so far, and also noticeably weaken the economy.
Inflation has been more stubborn than initially expected for months. The central bankers have therefore gradually raised their projections. As recently as June, they were still assuming that interest rates would be below four percent at the end of 2023. Then, three months later, they signaled a level of over 4.5 percent.
Job cuts are piling up – especially in the tech industry
And according to Powell, the forecast could tighten even further with the next release in December. Deutsche Bank assumes that the Fed will raise interest rates to five percent in the coming months.
However, the US economy is showing initial weaknesses, which can be attributed to the Fed’s tough monetary policy course. The U.S. unemployment rate recently edged up to 3.7 percent, and the trend could accelerate in the coming months, economists believe.
Job cuts have increased in the past few days, especially in the technology industry. Facebook’s parent company Meta is laying off 11,000 employees. 3700 are added to Twitter, 1100 to Fintech Stripe and crypto exchange Coinbase.
Scott Galloway, a professor at New York University and an outspoken critic of the tech world, assumes that the majority of the layoffs this time will not be simple jobs, but high-earning employees at start-ups and tech companies spoiled by success.
Mortgage financiers and brokers also continue to lay off employees on a large scale. The housing market is particularly hard hit by the course taken by monetary policymakers. The demand for mortgages has collapsed in view of the significantly higher interest rates, and house prices are also falling, causing the overheated market to cool down quickly.
In the past few days, central bankers have expressed mixed opinions about the future course of the Federal Reserve: The President of the regional Fed in Chicago, Charles Evans, emphasized on Wednesday that the central bankers would “slow down the pace of interest rate hikes as soon as we can”. Lorie Logan of the Dallas regional Fed, on the other hand, warned on Thursday that the inflation data was “a welcome relief, but we still have a long way to go”.
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