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US inflation slows down – but the expectation was not met

Markets react to the fresh CPI data with volatility. Fed hints hikes for longer, even possible higher terminal rate to bring the inflation down to 2%.

Inflation was the key to volatility today

As investors anticipated the publication of US inflation data, the stock market traded with a cautiously upbeat tone during the first part of the day. In January, the US Consumer Price Index increased at an annualized rate of 6.4%, which was lower than the last increase of 6.5%, but above the 6.2% predicted.

As inflation fell, although at a slower-than-anticipated rate, financial markets grappled with the numbers. Therefore, the Federal Reserve might continue to tighten monetary policy until it reaches its 2% inflation objective. The markets shifted away from risk, resulting in Wall Street’s steep decline and the US dollar’s surge.

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Observations from Dallas President of the Federal Reserve Lorie Logan put pressure on the stock market when she stated, the Fed must be prepared to maintain rate hikes for longer.  Also, John Williams, president of the NY Fed stated that the job to contain excessive inflation is not yet complete. Patrick Harker, Fed Philadelphia’s chair, calmed things down saying even though more hikes may come, they will likely end soon.

The Europeans will probably keep hiking as well. Gabriel Makhlouf, a member of the Governing Council of the ECB, stated that the Central bank may hike interest rates beyond 3.5% and keep them for the duration of the year.


US CPI chart, source

Markets moved more towards safe havens

The S&P 500 lacked direction, even though volatile, on Tuesday as equities fluctuated wildly on rising Treasury rates in response to inflation data. The S&P 500 declined 0.1%, the Dow Jones was down 0.38%, and the Nasdaq ended with a 0.24% rise.

The 2-year bond yield, which is susceptible to rate rises, soared to a three month high, exceeding 4.6%. The 10-year US Treasury bond was last seen as high as today on January 5th.

The EUR/USD fluctuated around 1.0700 and 1.0800 before settling at 1.0730. GBP/USD reached a high of 1.2268 but closed the day at 1.2160. The USD/JPY pair ended the trading session above 133.00. The USD/CAD pared early losses and is currently trading at 1.3340.

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In addition to inflation figures, the government of the United States also decided to sell 26 million barrels from its reserve. West Texas Intermediate was lower by $1.09, which is 1.4%, to $79.05 a barrel. 

Brent crude futures for April delivery fell 1.1%, to $85.64 a barrel. Monday’s two-week high of  $86.93 was followed by a two-week intraday low of $84.14 for the global crude benchmark.

Gold also acted as a safe haven and reacted to volatile US dollar. The yellow metal closed the day at $1865.60 with a 0.13% gain. Its silver sibling closed flat at $21.863, which is a 0.05% in the green. Natural gas halted the selling today.

Tomáš is a financial reporter with US markets as his main field. Tomáš is an aspiring author and entrepreneur aspiring to help people get better in financial knowledge.


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