Last week ended with a strong market rally, with Nasdaq hitting its all-time highest intraday rise in response to better-than-expected US inflation figures. All eyes are now on the pace of inflation deceleration and the Fed’s next monetary policy decisions.
The inflation figures published in the USA on Thursday revealed that prices rose less than expected in October. Year-on-year inflation was 7.7 per cent, which is 0.4 per cent less than in September. One of the reasons behind the decline is the significant drop in the prices of health care services and used cars.
The inflation figures published late last week led to a dramatic surge in the stock markets. The Nasdaq index gained more than seven per cent and the S&P 500 more than five per cent on Thursday. For Nasdaq, this was the 14th highest intraday rise ever. A rising trend was also observed in Europe, where equities, measured in euro, have risen over six per cent more than in the USA during November.
Interest rates also reacted to the inflation figures. They fell clearly in both the USA and Europe, as did the credit spreads, i.e. the additional returns required by the markets on an issuer’s bonds in relation to debt instruments of a similar maturity issued by solvent governments. The depreciation of the dollar has eaten into the returns on dollar-denominated investments from a euro investor’s viewpoint.
The increase in prices is expected to slow further over the next few months. What is essential is the pace at which inflation will decelerate and how the Fed, the US central bank, will react. Market expectations on future interest rate policy eased immediately after the inflation report was published, but it is important to keep in mind that, instead of making decisions based on single reports, the central banks are focusing on longer-term price development.
Bright Q4 economic outlook for the USA
Overall, the US economy has shown strong performance in recent months, and the final quarter is also looking up. The economy is forecast to grow by as much as four per cent by the end of the year.
However, at the same time, the likelihood of a recession is still considered to be high in the longer term. The Democrats’ loss of the House of Representatives also probably means that the support packages planned by President Biden’s administration will take more time to pass. On the other hand, one could argue that the markets will have more freedom to function with less intervention from the government.
Over the upcoming weeks, the markets will also keep an eye on the inventory levels of major distributors, including Walmart, and related communications.
Significant collapse on the crypto markets
On Friday, the crypto exchange FTX filed for bankruptcy, putting an end to long-brewing speculation. After the announcement, the assets of many users seem to have disappeared.
Over the weekend, doubts also arose about the solvency of a number of other crypto exchanges, fuelling fears of a wider deposit run. The crypto markets have been going downhill for quite a while, and the trend only seems to be gathering momentum. Crypto currencies will possibly have to reconsider their stance on regulation going forward.
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