Stock markets in the United States gained significantly during trading on Tuesday. They were moved to higher values by the report on the development of October inflation, which supported the expectation that the American central bank (Fed) will no longer have to raise interest rates. The US dollar, on the other hand, weakened in response, losing two percent against the koruna.
The year-on-year growth rate of consumer prices in the United States slowed to 3.2 percent in October from September’s 3.7 percent. At the same time, analysts expected inflation to slow to 3.3 percent. The year-on-year rate of so-called core inflation, which excludes fluctuating food and energy prices, decreased by a tenth of a point to four percent in October.
According to some experts, the reduction of inflation to the two percent target of the US Fed is thus on track. “There is no reason to believe that the target line will be the most difficult,” Ernst & Young chief economist Gregory Daco said of the latest inflation data.
Investors from Wall Street experienced another buying frenzy after a short pause, when the monitored stock index S&P 500 recorded an almost two percent gain, similar to the technology index Nasdaq.
Within the technology sector, all the “heavyweights” did well, led by the shares of the car company Tesla, which added approximately six percent. Shares of Nvidia also continued their sleepy ride, claiming the tenth day of growth in a row. The market value of the stock market in the USA increased by more than 700 billion dollars, i.e. by almost 16 trillion crowns, on the wave of optimism on Tuesday.
“European stock indexes also rose in response to positive inflation data, closing at monthly highs, although preliminary data also showed the eurozone economy contracted slightly in the third quarter, underscoring expectations of a technical recession if the fourth quarter turns out to be similarly weak,” the stockist noted Česká spořitelna analyst David Vantruba.
Relief for markets
While the first half of the year was marked by a slowdown in American inflation, inflation accelerated again in the previous three months. This break and reversal of the trend from the first half of the year thus brought considerable relief to the entire financial market.
Last June, the rate of inflation in the United States reached its highest level in more than 40 years, when it stood at 9.1 percent. The US Fed responded by sharply increasing the main interest rate, which is in the range of 5.25 to 5.50 percent. The US central bank also left it at this level at the beginning of this month, but did not rule out further increases.
“If it’s appropriate to tighten monetary policy further, we won’t hesitate,” Fed chief Jerome Powell said last week. Other key representatives of the central bank spoke in a similar tone. However, after Tuesday’s inflation data, markets firmly believe that US rates have reached their peak, and on the contrary, they are looking for their first cut.
First reduction in July
According to FedWatch, a tool that measures market expectations for Fed interest rate changes, markets are currently counting on a scenario where the U.S. central bank will cut rates for the first time at its meeting in late July next year. At the same time, investors have almost completely ruled out the possibility of a rate hike at the last session of the year in December.
Data on the development of inflation in the United States also helped the Czech crown, especially against the US dollar. It also lost against other Central European currencies on Tuesday, before erasing some of the previous losses during Wednesday’s trading. The koruna strengthened against the US currency below the threshold of 22.50 per dollar, which was its best close in almost ten weeks.
“Yesterday’s movement of the koruna only proves how important the mood on the global markets is for it at the moment,” ČSOB Group analysts said. According to them, without CNB support in the form of foreign exchange interventions, the koruna is undoubtedly more vulnerable than it was in the first half of 2023.
They point out that the first rate cut by the Czech National Bank is also “imminent”, which will further reduce the difference between the yields of the koruna and the euro or dollar, or the so-called interest differential.
“This is precisely why the koruna is very sensitive to inflationary news coming from global markets. “Investors interpret the lower inflation figures as a ‘success’ of the current level of monetary restriction in the US and bet on a lower need for monetary restriction in the future,” the analysts add.