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Lower Inflation Triggers Rally

Markets gained ground last week following a cooler-than-expected CPI inflation reading in the US for October, marking the first decline in four months (to 3.2%) and significantly lower than the previous month. Every developed equity index experienced a rally, with the S&P 500, Nasdaq Composite, and Europe’s Stoxx 600 indexes advancing by more than 2%, while the MSCI Emerging Markets index added 3%. US stocks displayed a broad improvement as all sectors ended firmer, with real estate, materials, and financials leading the way.

The positive news for risk assets, given the higher likelihood that policy rates are at or near their peak, impacted the dollar with a sharp weekly drop, while bond prices recovered, causing yields to lower across maturities.

US-China Relations: President Xi Jinping visited the US last week and met with Biden and business leaders to help expand their presence in mainland China.

“The world needs China and the US to work together for a better future. China is ready to be a partner and friend of the US,” Xi Jinping said.

Spain Politics: Socialist Prime Minister Sanchez secured the votes needed (179 vs 171) from the Catalan separatist party to retain power.

Argentina Politics: The runoff Presidential election takes place today, with incumbent Peronist (left) Finance Minister Sergio Massa and Libertarian economist (right) Javier Milei as the contenders.

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Inflation Falls

Consumer prices in the US were unchanged in October and 3.2% YoY, the first decline in four months and the lowest rise in two years as well as a significant fall from the 3.7% recorded in September. The core CPI reading was 0.2% MoM and 4.0% YoY in October, marginally lower than the previous month. Gasoline, airfares, hotel accommodation and used vehicle prices fell while rental costs (at a lower pace), recreation expenses and motor insurance rose in October.

Although inflation remains above the Fed's 2% target, investors hope that the Fed is done with increasing rates. Futures markets are now anticipating a rate cut next May, according to the FedWatch tool of the CME. Since March of last year, the Fed has increased its policy rate by 525bp to the actual 5.25-5.50% range.

Mary Daly, President of the San Francisco Fed said the central bank should make sure that the current disinflation trend continues and brings inflation down to target and warned against expectations that the tightening cycle was over.

“What I worry about is that without a sufficient amount of information about whether we’re really on that disinflationary process that brings us back to 2%, we have to stop-start,” she said.

UK inflation decelerated rapidly in October with the CPI reading at 4.6% YoY compared to 6.7% in September, beating expectations. The rise was the smallest in two years, leading investors to increase their bets on Bank of England rate cuts during 2024.

The central bank projects inflation will fall to its 2% target by late 2025. Core inflation, which excludes volatile items such as energy and food prices, dropped to 5.7% from 6.1% in September. Despite this improvement, Britain remains the G7 country with the highest annual inflation rate.

"In January, I made halving inflation this year my top priority. Today, we have delivered on that pledge," Prime Minister Rishi Sunak said.

"Now we are beginning to win the battle against inflation we can move to the next part of our economic plan, which is the long-term growth of the British economy," Finance Minister Jeremy Hunt said.

There were no monetary policy meetings in developed markets last week.

Interest Rates $

The DXY dollar index recorded its most challenging week in four months, experiencing a 1.8% decline to 103.9 points. This drop marked a period where the dollar depreciated significantly against major currencies such as the Euro, Aussie dollar, Sterling, and Swiss franc. Looking at the year-to-date performance, the Japanese yen, concluding the week below the 150 mark, retains its status as the weakest major currency against the dollar, with a notable 14% decrease. Conversely, the euro has now entered positive territory for the year, closing at 1.0906, its strongest level since late August.

A US inflation reading that was cooler than expected has heightened the likelihood of interest rates starting to decline sooner than previously anticipated. Consequently, sovereign yields in developed countries experienced substantial declines across all tenors and regions. The benchmark 10-year Treasury yield witnessed a 19bp week-to-date drop, settling at 4.44%, the lowest level in two months. Notably, all leading yield curves (US, Germany, UK) continue to exhibit an inverted pattern.

Portugal’s credit rating was upgraded two notches by Moody’s to A3. The 10-yr PGB yield narrowed by 7bp last week to Bunds +66bp for a 3.25% yield. 


Crude oil markets experienced high volatility as prices recovered by 4% on Friday but still ended modestly lower for the week, as traders covered their short positions to profit from the recent decline. Brent has lost 20% from this year’s peak in late September.

Additionally, the US imposed sanctions on shipping companies and specific vessels that transport Russian oil above the price cap determined by the US and its allies. OPEC+ members meet on November 26 to decide whether to make additional output cuts.

Cocoa prices reached $4,000 per tonne in New York markets, the highest level since 1978, driven by a weak supply outlook in Western African production leaders Ivory Coast and Ghana. Weather conditions, including the effects of the El Niño phenomenon, are threatening the cocoa market dynamics to fall into deficit for a third straight year. 

The precious metals complex benefited from the steep drop in the dollar (DXY index -1.8%, steepest in four months) and the US inflation reading (3.2%) that supports a scenario of policy interest rates having reached their peak.