US stocks and bonds jump after inflation falls to 3.2%

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US inflation fell more than expected to 3.2 per cent in October, the first decline in four months, prompting Treasury yields to fall sharply and US stock futures to climb.

Tuesday’s consumer price data compares with a 3.7 per cent rise in the 12 months to September. The 3.2 per cent figure was also marginally below expectations of 3.3 per cent.

Yields on rate-sensitive two-year Treasuries, which move inversely to prices, dropped 0.13 percentage points to 4.9 per cent, while yields on benchmark 10-year Treasuries fell 0.14 percentage points to 4.48 per cent.

Contracts tracking Wall Street’s benchmark S&P 500 and those tracking the tech-heavy Nasdaq 100 rose 1.3 per cent and 1.6 per cent respectively, ahead of the New York open.

The dollar fell 0.8 per cent against a basket of six other major currencies. 

The Federal Reserve held its benchmark interest rate steady at a 22-year high earlier this month, and investors have become increasingly confident that rates have peaked as inflation has come under control.

Core inflation — which strips out volatile food and energy prices — was also slightly weaker than economists had predicted, dipping from 4.1 per cent to 4 per cent on a year-on-year basis. Core inflation rose 0.2 per cent month on month.

Fed chair Jay Powell stressed last week that policymakers would not be “misled by a few good months of data”, and that the central bank could tighten monetary policy further if necessary, although officials have shown little intention of immediately raising rates beyond the current range of 5.25 to 5.5 per cent.

Stronger than expected gross domestic product growth has fanned fears that the slowdown in inflation could stall, but Powell said last week that he and his colleagues expected the pace of economic expansion to slow. 

Instead of another interest rate rise, the Fed is increasingly expected to push back the timing of rate cuts deeper into 2024 if consumer prices remain stubbornly high.

This article has been updated to correct the number of months since inflation last fell