Stock market surges by most in two years

The consumer price index (CPI), a key measure of inflation, rose at an annual pace of 7.7 per cent in September.

That was below analyst expectations and a dip from the 8.2 per cent rate in September.

The dollar plunged more than 3 per cent against the yen, while the pound jumped 2.7 per cent against the greenback and the euro rose 1.5 per cent.

Meanwhile, stocks surged with the biggest spike in two years and the best post-inflation day rally since 2008.

On Wall Street, the Dow gained nearly a thousand points in late morning trading, or 3.0 per cent.

The broader S&P 500 jumped 4.5 per cent and the tech heavy Nasdaq Composite soared 5.9 per cent.

“Inflation has finally started to drop like a rock in the US and this is the best news that anyone can expect,” said AvaTrade analyst Naeem Aslam.

“The Fed will still continue to increase the interest rate but there is no need to be aggressive about this — which means that the pace of interest rate hikes will slow down now.”

Edward Moya, senior market analyst at OANDA trading group, said the inflation report was a “nice surprise”.

“Inflation has been very slow to come down, but this report gives up hope that this deceleration with pricing pressures might bring back hopes of a soft landing,” he said.

“The headline reading came in lower-than-expected, but most traders were focused with the month-over-month decline with core prices. If this downward trajectory for inflation holds, then you can make a strong case that the bottom is in place for US equities.”

Mr Moya said Wall Street “finally sees a light at the end of the Fed’s tightening cycle tunnel”.

“This cool inflation report helped stocks post their best trading day in two years,” he said. “Treasury yields are in free fall, the dollar is tanking, and practically every risky asset is rejoicing over this inflation report.”

The Fed’s main policy rate currently stands at between 3.75 to 4.0 per cent, and investors have been keen on determining when policymakers will “pivot” away from its aggressive 0.75 percentage point hikes or “pause” them altogether.

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

“This dovish shift has had an outsizes impact on markets,” he said. “There’s optimism that the worst of the selling may be behind us,” on equity markets, which are down heavily this year.

Covid and crypto

Markets are grappling also with the impact of strict zero-Covid measures in China, with supply chains and activity slowed by harsh lockdowns and testing policies.

“China’s domestic demand is weak and their key trading partners are entering recession territory,” said Mr Moya.

The crypto world has meanwhile been rocked by a surprise decision from Binance, the world’s biggest cryptocurrency platform, to scrap a possible acquisition of rival FTX.com a day after disclosing it had signed a non-binding letter of intent to buy it.

The near-collapse of FTX plunged bitcoin to a two-year low this week.

“FTX’s slump from over a $US32 billion valuation to zero in less than a few days raises numerous issues,” said Stephen Innes at SPI Asset Management.

“Prominent investors are wearing eggs on their faces after diving in head first.”

He added that gold and silver would be the biggest beneficiaries of the crypto fallout with investors looking to the trusted precious metals for stability.

Mr Moya noted the CPI report had spurred a broadbased crypto market rally.

“[But] investment into cryptocurrencies will likely struggle here as too many key institutional investors and crypto companies have money tied up with the bankruptcy bound exchange,” he said.

“Until we see which players were impacted by FTX and if we see other exchanges vulnerable to a liquidity crunch, any crypto rebound might be faded. More details about the actions of FTX will lead to harsher regulatory guidelines for all crypto exchanges. Reportedly FTX used customer assets for risky trades, which means it seems unlikely anyone will want to rescue this company.”

— with AFP