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Markets Soar As Inflation Hits Lowest Level Since January

Key Takeaways

  • Inflation has increased 0.4% in October, below forecasts of 0.6%.
  • This brings the annual rate down to 7.7%, the lowest level seen since January this year.
  • It’s hoped that this will mean the Fed is able to implement their plan of slower rate hikes, which would take some of the immediate pressure off households and businesses.
  • The stock market has reacted positively, with the S&P 500 up over 4% and the NASDAQ Composite up close to 6% in Thursday morning trading.

The consumer price index in the US hit its lowest level since January in signs that the Fed’s aggressive rate hike policy may finally be starting to have an impact. Prices rose by 0.4% for the month of October, bringing the annual figure down to 7.7%.

This is a sizable drop from the 8.2% from September, and below most analysts forecasts which projected prices rising by 0.6% over the month.

It’s some much needed good news for the markets, with the S&P 500 opening up over 4% on Thursday morning. Government bonds also rallied on the hope that yields may be able to level off if the Fed is able to moderate the rate rise cycle.

Despite four 0.75 percentage point increases in a row, the Fed has struggled to bring inflation under control. It remains their number one priority, and chairman Jerome Powell has made it clear that they are prepared to send the economy into a recession if it’s necessary to bring inflation back to the target range of 2-3%.

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Latest inflation figures explained

Headline inflation for October hit 0.4%, which was below the 0.6% figure that many analysts had been expecting. Core inflation, which removes the often highly volatile food and energy sectors, was up 0.3% which is half the level of price rises experienced in September.

The increase in food prices slowed to 0.6% from 0.8% last month, despite food away from home increasing at 0.9% again, the same as last month. Within the category, health nuts will be happy as the price of fruit and vegetables dropped 0.9% after going up 1.6% in September.

Energy prices increased for the first time in four months, with the previous three notching declines in the average cost. This was mainly down to an increase in gasoline which was up 4% and fuel oil which was up 19.8%.

Electricity prices remained broadly flat with an increase of 0.1% in October while piped gas fell -4.6% over the month.

Other items which fell in price in October include used cars and trucks (-2.4%), apparel (-0.7%) and medical care services (-0.6%).

In addition to the energy items, the only other category which increased over last month was shelter, which was up 0.8% in October, taking the annual rise to 6.9%.

What this means for interest rates

After last week’s interest rate hike, Fed chairman Jerome Powell commented that the central bank would consider slowing the rate at which rates have been increasing. This came at the same time as comments that the peak rates were likely to be higher than originally expected and that the cycle would also potentially last longer.

The idea behind that was to attempt a less damaging slowdown of the economy, with the aim to reduce the inflation rate without sending GDP growth negative.

This latest announcement is most likely causing the members of the Fed to breathe a collective sigh of relief. It’s progress that may allow them to follow through with slowing the rate of rate increases.

The markets think so too. The S&P 500 soared at the open and was up over 4% by mid-morning. Despite the crypto rout underway in the fallout of FTX’s apparent collapse, the NASDAQ Composite was up even more, gaining almost 6% over the course of the morning.

What this means for investors

Inflation coming down is obviously very good news for all of us. Regardless of whether you’re a business or an individual, the rate at which prices have been increasing has been causing significant damage to livelihoods all across the world.

This could be a sign that the tide is beginning to turn. Whilst it has been a long time coming, it’s also not unexpected. There have been many factors working towards getting the rate down, and it’s not just the Feds consistent rate hikes.

Much of the current high inflation can be attributed to the issues of the pandemic. Supply chains have been struggling to catch up with surprisingly robust demand, and the greater opportunities afforded to many workers has meant the labor market has been tight.

While analysts can’t necessarily predict the future, it is possible to spot trends that appear to be emerging. In many cases, these trends are based on historical events that can provide clues as to how the market might respond under a similar set of circumstances,

For investors, these trends provide opportunities to profit.

One trend we spotted in the Summer was that the US stock market had been beaten down significantly worse than many other markets across the world. Countries like the UK have held up significantly better than the American market, despite a less favorable economic outlook.

For comparison, the S&P 500 is down around 18% so far this year, while the UK’s FTSE 100 is down less than 2%, despite dealing with multiple sacked Prime Ministers, an energy crisis and continued post-Brexit challenges.

It’s a similar story across much of Western Europe and the Asian Pacific (APAC) region, specifically Hong Kong, Japan and Australia. That doesn’t make too much sense through a long term lens.

To capitalize on this trend, we created the US Outperformance Kit. This Investment Kit takes a long position in the US stock market, while at the same time taking a short position in Western Europe and APAC.

This means that investors can profit from the relative change between. Even if global markets continue to trend down or flat, this Kit can generate a positive return as long as the US holds up better than the rest.

It’s a sophisticated pair trade that’s usually for the high fliers at the point end of the plane, but we’ve made it available for everyone.

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