Investor optimism surges on easing inflation

The US Federal Reserve is not expected to raise interest rates at its last meeting of the year in December

Data showing that inflation is easing has spurred optimism in markets. AP

November has turned out to be an impressive month for financial markets.

At the time of writing, the S&P 500 index is up more than 7.6 per cent in November and the Dow Jones Industrial Average is 5.7 per cent higher during the same period.

Last week’s US inflation data showed that pricing pressure seems to be subsiding and, as a result, has spurred optimism in markets.

The US Federal Reserve is keeping close tabs on inflation following its historic monetary policy measures introduced in 2020 to cool the cost of living by raising interest rates.

While the overall inflation print for October came in at 3.2 per cent year on year (versus an expected 3.3 per cent, down from 3.7 per cent in September but above the 2 per cent Fed target), it is clear that inflation is on the downturn and moving in the right direction.

Core inflation, excluding food and energy, also edged down, with year-on-year prices at 4 per cent. This compares with an expected 4.1 per cent in both September and October.

Producer prices, a measure of the change in selling prices of goods and services, also declined last month.

However, weekly jobless claims came in a touch higher, indicating that the US labour market seems to be showing signs of cooling off.

Typically, a hotter-than-expected US labour market affects inflation, which the Fed has noted in its past statements.

This combination of reducing price pressures and a cooling labour market increases the likelihood of a “soft landing”, which is seen with much optimism and spurs overall risk-on moods.

I expect the optimism to continue through the early part of December, especially if crucial US data points come in either in line or stronger than expected.

While it is a shortened trading week due to the US Thanksgiving holiday on Thursday, the gross domestic product reading on November 29 will provide a major update on the health of the US economy.

This will be followed by the Fed’s preferred inflation metric, the personal consumption expenditures price index reading, on November 30.

Manufacturing figures on December 1 will be important while attention will shift to November’s payroll report on December 8, before the final Federal Open Market Committee meeting of the year on December 14.

While I am not expecting any major fireworks from the Fed, we will not see another rate hike in 2023.

One month ago, there was a 20 per cent probability of a rate hike to the channel between 5.5 per cent and 5.75 per cent.

However, with the string of better data recently, this probability has fallen to zero per cent at the time of publishing.

It will be an interesting few weeks until the middle of December, when liquidity will dry up and traders go on leave for the holiday season.

Gold has been rather uninspiring this month, trading as low as $1,932 and as high as $2,004.

I expect resistance to hold at $2,010 through to the end of the year, with support kicking in between the $1,935 and $1,940 channel.

Gaurav Kashyap is a risk manager at Equiti Securities Currencies Brokers. The views and opinions expressed in this article are those of the author and do not reflect the views of Equiti Securities Currencies Brokers