Today's CPI report came in well under estimates even by the forecast by the Federal Reserve Bank of Cleveland's Inflation Nowcasting. The Federal Reserve Bank of Cleveland's forecasting tool as recent as yesterday was projecting that the CPI index for October would come in at 8.09%. This morning the BLS reported that the CPI index for October increased by 7.7% year-over-year.
"The Consumer Price Index for All Urban Consumers (CPI-U) rose 0.4 percent in October on a seasonally adjusted basis, the same increase as in September, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all-items index increased 7.7 percent before seasonal adjustment.
The index for shelter contributed over half of the monthly all items increase, with the indexes for gasoline and food also increasing. The energy index increased 1.8 percent over the month as the gasoline index and the electricity index rose, but the natural gas index decreased. The food index increased 0.6 percent over the month with the food at home index rising 0.4 percent."
Today's report immediately had a profound impact on market sentiment sending ripples through asset classes across-the-board. As of 4:15 PM EST gold futures basis, the most active December contract is trading at $1760 which is a gain of 2.71% or $46.50.
The US dollar had a steep selloff giving up 2.45% with the dollar index currently fixed at 107.75. The largest percentage decline today occurred within government debt instruments such as Treasury Bonds and Notes. The CBOE 10-year Note futures contract declined by 7.76% and is currently yielding 3.829%. Futures on 30-year Treasuries declined by 5.53% and are currently yielding 4.081%.
US equities had a strong rally with the Dow Jones Industrial Average gaining 3.7% or a gain of 1201.43 points, and is currently fixed at 33,263.91. The S&P 500 gained 5.53%, and the NASDAQ composite gained 7.35%.
The dramatic gains seen in equities and precious metals as well as the sharp selloff in the US debt instruments and the dollar were shaped by the perception that inflation coming in under the estimates suggests we will see a more accommodative Federal Reserve when it meets for the last FOMC meeting this year in December.
According to the CME's FedWatch tool, there is an 80.6% probability that the Fed will raise rates by 50 basis points in December rather than 75 basis points which now has only a 19.4% probability of occurrence. Most noteworthy is the net change in the probability of a 50-basis point rate hike in December which was at 56.8% yesterday and over 80% today.
What is most significant about today's inflation report is that although it came in under estimates inflation is still exceedingly at 7.7%. With market perception and sentiment now assuming a more dovish Fed and inflation still at an extremely high rate it is the perfect environment for gold to gain value. It was the aggressive rate hikes by the Federal Reserve that kept gold from moving higher rather than the sharp decline witnessed in March of this year. Even with inflation spiraling, market participants focused on the effect of rising interest rates rather than rising inflation. This most certainly will reshape market participants' focus from higher rates to high inflation.
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