Pound and stocks surge after drop in US inflation
WALL STREET has enjoyed its biggest surge in two years and sterling rocketed versus the dollar after a surprise cooling in US inflation boosted hopes of a lower peak for interest rates.
Traders slashed their bets on more aggressive interest rate rises by central banks after official data showed US prices rose by 7.7pc last month, the weakest rate of inflation since January.
Signs of a turning point for prices in the world’s largest economy triggered a worldwide rally in stocks, sent the dollar tumbling and slashed government borrowing costs.
The pound soared 3.3pc against the dollar to $1.1717. Meanwhile, the S&P 500 soared more than 5.5pc, while the Nasdaq surged 7.4pc. European and UK stock markets also joined the rally.
Inflation was down from 8.2pc in September and last month’s reading was lower than economists predicted.
The figures fuelled hopes of a turning point that would allow rate-setters at the Federal Reserve to be less aggressive in tackling inflation with increases to borrowing costs.
Mike Bell, global market strategist at JP Morgan Asset Management, said: “Jerome Powell and equity markets will breathe a sigh of relief that inflation is finally moving downwards. This gives the Fed room to slow the pace of their rate hikes.”
Markets pared their bets on rapid rises following the data release and now expect rates to peak at below 5pc in the US. But economists cautioned that the Fed’s fight to tame inflation is not over yet, predicting that the central bank will be able to slow the pace of rate rises from 0.75 percentage points to 0.50 next month.
James Knightley, chief international economist at ING, said: “We can’t give the all-clear yet.
“The jobs market remains tight and month-on-month readings are still tracking far higher than required to get inflation back to 2pc.”
Paul Ashworth, US economist at Capital Economics, said the surprise reading will “mark the start of a much longer disinflationary trend” that persuades the Fed to halt rate rises early next year.
Bond yields fell across the US and Europe to further ease the pressure on Jeremy Hunt ahead of next week’s Autumn Statement.
The UK 10-year gilt yield fell 16 basis points to 3.28pc, the lowest since before the mini-budget. The Chancellor will save almost £9bn in debt interest costs as a result of the fall in gilt yields from their post mini-budget peak, rule of thumb estimates from the Office for Budget Responsibility suggest.