Reaction: Nov US CPI cools down, spelling relief for markets

A person shops in a supermarket as inflation affected consumer prices in Manhattan, New York City, U.S., June 10, 2022. REUTERS/Andrew Kelly

NEW YORK, Dec 13 (Reuters) - U.S consumer prices barely rose in November amid declines in the cost of gasoline and used cars, leading to the smallest annual increase in inflation in nearly a year, which could give the Federal Reserve cover to start scaling back the size of its interest rate increases on Wednesday.

The consumer price index increased 0.1% after advancing 0.4% in October, the Labor Department said on Tuesday. Economists polled by Reuters had forecast the CPI gaining 0.3%.

In the 12 months through November, the CPI climbed 7.1%. That was the smallest advance since December 2021. Annual inflation is slowing in part as last year's big increases drop out of the calculation, while Fed tightening is also dampening demand. read more

MARKET REACTION:

STOCKS: S&P 500 futures extended gains sharply and were up 2.8%

BONDS: The yield on 10-year Treasury notes tumbled and was down 15 basis points at 3.461%; The two-year U.S. Treasury yield was down 17.8 basis points at 4.225%.

FOREX: The euro extended a rally against the tumbling dollar , up 1.15%. The dollar index was off 1.1%

COMMENTS:

RICHARD FLAX, CHIEF INVESTMENT OFFICER, MONEYFARM, UK

"As a starting point, it's a positive signal that inflation has very gradually moved lower from very high levels to where central banks would like it to be. In a longer-term perspective, it's shows that it is a long process but still it's another data point to suggest that inflation will begin to come down towards the targeted 2% and that should be positive for households and positive for risky assets. The challenge, of course, is regarding what will happen in around short-term positioning."

"The consensus view is that the peak rate maybe a little bit below 5% which we believe will reach sometime in the second quarter of next year. We would broadly subscribe to the view that markets are expecting a relatively quick shift from the Fed from having raised interest rates till now, to cutting rates over a relatively short time period. Our perspective is that the market is pricing in the possibility that the Fed stays at its peak rate for a little bit longer."

GREG BASSUK, CEO, AXS INVESTMENTS, NEW YORK

“The CPI print should start softening of recent alarm bells for Main Street and Wall Street. It’s a pleasant surprise, as investors have been feeling pinched between elevated prices and the Fed’s enduring battle to slow the economy.”

“Our view is that all eyes are going to be laser focused on this week’s Fed rate hike decision and Powell’s commentary for greater visibility as to the actions of the Fed.”

“(The surge in stock futures) is proof-positive that investors are hanging their hat on the trajectory that seems now to be headed downward.”

“We are cautiously optimistic of a soft landing, and we expect the markets to remain volatile as we move into 2023 and as we continue to monitor inflation and other economic data that would provide the roadmap for Fed policy.”

“We are continuing to believe that investors would be prudent to consider inflation assets.”

RANDY FREDERICK, VICE PRESIDENT OF TRADING AND DERIVATIVES, CHARLES SCHWAB, AUSTIN, TEXAS"I'm not surprised the markets are rallying. That makes sense because while it's almost certain we're going to get a half a point rate hike tomorrow, this could impact the rate hike that happens in February."

"The highest probability for February is that it will be a quarter point (hike). This is at least showing that things are moving in the right direction and that could lower the probability of that quarter point to potentially no raise at all on February 1st."

"It's encouraging to see an easing however so slight, but this is a single data point among several that will come out between now and February 1st that can impact that (Feb) rate hike."

DAVID WADDELL, CEO AND CHIEF INVESTMENT STRATEGIST AT WADDELL & ASSOCIATES, TENNESSEE

“No surprise here. The Fed has tightened aggressively, and money supply growth has collapsed. When inflation falls from high levels, it tends to fall fast. However, the Fed still wants to un-employ 2 million more American’s, just to be sure. Recession remains the Fed’s primary policy tool. Disinflation momentum relieves valuation pressures while recession momentum adds earnings pressure. Valuation compression was last year’s story, earnings compression will be next year’s story. The degree of earnings recession depends on the depth of the economic recession choreographed by the Fed.”

PETER CARDILLO, CHIEF MARKET ECONOMIST, SPARTAN CAPITAL SECURITIES, NEW YORK

“Good news on the inflation front. There’s a definite trend that inflation is moving lower. That’s good news for the market and good news for Fed.”

“It means a less aggressive Fed going forward, (an interest rate hike of) 50 basis points tomorrow and possibly two more 25 basis point hikes. The numbers are definitely going in the right direction. Inflation has peaked and it’s playing into the hands of the Fed.”

“The dollar is coming down, metals are soaring, strong bond rally. The year-end rally is now in full blossom.”

“I think we’re still headed for a mild recession. It should be expected, because the effects of the last two rate hikes are not really felt in the economy yet.”

BRIAN JACOBSEN, SENIOR INVESTMENT STRATEGIST, ALLSPRING GLOBAL INVESTMENTS, MENOMONEE FALLS, WISCONSIN

“Rent inflation may be moderating sooner than many feared. The annualized monthly rate of core inflation was only 2.4% in November, down from 3.5% in October, and way lower than the 7.2% in September. If the inflation numbers stay where they are, we’re already close to peak tightness for where monetary policy should be. We’re likely one or two more hikes away from where the Fed is aiming.”

ART HOGAN, CHIEF MARKET STRATEGIST, B. RILEY, NEW YORK

"The Fed has raised rates pretty significantly over the course of this year and we're starting to see the real results today. And I think what that tells us is that when the Fed meets tomorrow, they likely will have the ability to say we're raising rates by less than what they have been, at 50 basis points, and the place at which we stop will likely be at 5%."

"Now this is very much in line with what we've been thinking about for the coming year that inflation will slowly pull back. It pulls back more significantly in the first quarter as the housing sector starts to catch up with reality."“Directionally and sequentially the CPI report for November is certainly better than anticipated, when expectations were for it to be pretty good. It shows that what the Fed has done is starting to take hold”

Compiled by the Global Finance & Markets Breaking News team

Our Standards: The Thomson Reuters Trust Principles.