US CPI inflation data for October released earlier today was a key macro report scheduled for today. Report turned out to be a dovish surprise, with both headline and core gauges coming in below expectations. While scale of surprise wasn't big, scale of the post-CPI move was the largest in months! Let's take a closer look at today's reading.
CPI slows more than expected
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Open account Try demo Download mobile app Download mobile appUS CPI report for October showed lower than expected readings for headline and core price growth gauges. Headline CPI slowed more-than-expected to 3.2% YoY, the lowest reading since July 2023, while core gauge unexpectedly dropped to 4.0% YoY - the lowest reading since September 2021! A softer-than-expected data triggered dovish reaction on the markets, sending indices and gold surging while USD and US yields plummeted. Scale of the moves was massive as today's inflation print showed that Fed is doing good job bringing inflation down, and boosted market hopes that rate hike cycle is over already.
US, CPI report for October
- Headline (annual): 3.2% YoY vs 3.3% YoY expected (prev. 3.7% YoY)
- Headline (monthly): 0.0% MoM vs 0.1% MoM expected (prev. 0.4% MoM)
- Core (annual): 4.0% YoY vs 4.1% YoY expected (prev. 4.1% YoY)
- Core (monthly): 0.2% vs 0.3% MoM expected (prev. 0.3% MoM)
Contributions to US CPI inflation. Source: US BLS, Macrobond, XTB Research
Shelter remains key contributor
As one can see on the chart in the previous section, shelter remain a key contributor to US inflation in October. This category contributed 2.35 percentage points to the overall reading. However, measures of shelter inflation used by US Bureau of Labor Statistics are lagging reality by a huge margin. A chart below that plots US CPI shelter component against Case Shiller home price index with an 18-month lead. We can see that Case Shiller index is hinting at significant drop in US CPI shelter component in the months ahead, what should put downward pressure on the overall CPI readings and support view that Fed rate hike cycle is over already.
US CPI shelter component and Case Shiller home price index. Source: US BLS, Macrobond, XTB Research
Markets see more dovish Fed ahead!
Today's post-CPI reaction on S&P 500 futures was the largest in months, with front-month contract jumping over 1.2% in the first 30 minutes following the release. Scale of surprise in the data was not too large, but it has led to massive changes in money market pricing of future Fed moves.
Markets saw an around-30% chance of Fed delivering rate hike at the turn of 2023 and 2024 as recently as yesterday. However, markets now price in a less than 5% chance of such a move. Moreover, while markets fully priced in 25 bp Fed rate cut for July 2024 yesterday, they are now seeing Fed delivering a 25 bp rate cut in June, followed by another one in July! Third rate cut in 2024 is fully priced in for November 2024 with the fourth being almost fully priced in for December 2024 meeting!
Markets are now expecting Fed to cut rates by almost 100 basis points over the course of 2024! Source: Bloomberg Finance LP
A look at the charts
EURUSD
EURUSD surged following release of US CPI data for October, with USD weakness driving the move. The main currency pair jumped above the resistance zone marked with 38.2% retracement of the downward move launched in mid-July 2023. Bulls did not stop there, and the pair has broken above the 200-session moving average later on as well (purple line). However, gains slowed later on and EURUSD now trades just slightly below the resistance zone ranging below 50% retracement.
Source: xStation5
US500
S&P 500 futures (US500) rallied as CPI release boosted odds for the end of Fed rate hike cycle. Index is gaining almost 2% on the day and trades at the highest levels in 2 months! Taking a look at the chart from a technical point of view, we can see that the resistance zone in the 4,500 pts area is being tested at press time. A break above would pave the way towards the 4,580 pts mark, which is a textbook range of the upside breakout from a recently-broken bearish channel.
Source: xStation5
GOLD
GOLD as well as other precious metals benefit from post-CPI drop on the USD market as well as on US yields. Taking a look at the chart at D1 interval, we can see that a bullish pinbar pattern was painted yesterday at the important price zone - support marked with 200-session moving average (purple line) and 50% retracement of the downward move launched in May 2023. Today's surge in gold prices plays well into this bullish technical setup. The near-term resistance to watch can be found in the $1,975 per ounce area marked with 61.8% retracement.
Source: xStation5
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