11 November 2022
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Markets rally on slower than expected US inflation print

By Daniel Richards

Markets and policymakers were able to breath a big sigh of relief after US inflation for October came in slower than expected. Headline CPI rose by 7.7% y/y compared with market expectations of 7.9%. On a monthly basis, inflation held steady at 0.4% compared with the 0.6% expected. But the core number was a major improvement, slowing to 6.3% y/y compared with 6.5% expected and the 6.6% recorded in September. Monthly core inflation also slowed substantially to just 0.3%. We have seen single month improvements in the inflation print in the past couple of months and they have failed to shift the Federal Reserve’s stance on keeping monetary policy tight. While the October print is positive, and markets have already tempered their view on where terminal rates will be in 2023, we still expect the Fed to hike again in December and to make use of smaller hikes in 2023 to ensure that inflation is wrenched out of the economy as much as possible.

Dubai’s headline CPI inflation slowed to 5.4% y/y in September, down from 6.0% the previous month, marking the second month in a row that price growth slowed, falling from the peak of 7.1% hit in July. Transport inflation, which has been the major driver of price growth this year, slowed to 18.1% y/y, from 27.0% in August, as petrol prices fell. However, with prices at the pump having been raised by nearly 10% in November, coming inflation prints will reflect renewed pressure from transport. Meanwhile, restaurants and hotels inflation rose to 6.3% in September, up from 5.2% in August, suggesting that price growth is becoming more entrenched in services now.

Egypt’s CPI inflation rate accelerated to 16.2% y/y in October, up from 15.0% the previous month. Prices were 2.6% higher than in September. Inflation was higher y/y in October than in September in every component of the basket save education and transport, and with the sharp move lower by the EGP against USD at the end of October, price pressures are set to remain to the fore in the coming months. Higher prices for imports have weighed on Egypt’s external position this year, among other factors, and finance minister Mohamed Maait has told Bloomberg that the funding gap is around USD 16bn over four years. The government aims to explore other financing avenues such as the ‘Chinese, Japanese and Sukuk bond markets’, making itself less reliant on hot carry trade flows.

Today’s Economic Data and Events

  • 11:00 TU Industrial production Sept: forecast 3.3% y/y
  • 11:00 UK GDP q/q Q3: forecast -0.5%
  • 11:00 UK Industrial production y/y Sept: forecast -4.4%
  • 16:00 IN Industrial production y/y Sept: forecast 2%
  • 19:00 US University of Michigan sentiment index Nov: forecast 59.5

Fixed Income

  • The slower than expected CPI print helped to spark a rally in US Treasuries, abetted by a strong auction of long-dated bonds. Yields on the 2yr UST dropped from more than 4.6% early in the day to about 4.3% following the release of the CPI and closed the day down 25bps at 4.3321%. The 10yr UST saw similar moves, falling from more than 4.1% early in the session to nearly 3.8% by the close, all told a 28bps move lower.
  • Regional Fed speakers appeared encouraged by the positive CPI print but cautioned markets that it wouldn’t be enough to prompt a substantial shift in policy. Lorie Logan, of the Dallas Fed, said that a “slower pace should not be taken to represent easier policy” while Mary Daly from the San Francisco Fed said that “pausing is not the discussion, the discussion is stepping down.”
  • European bonds also caught a major bid on the back of the moves in Treasuries with bund yields falling 16bps to 2% and French 10yrs down 19bps to 2.492%. Gilt yields fell 16bps to 3.280%.
  • Bond markets more generally also soared with an index of high-yield bonds up 1.7% while EM USD-denominated bonds gained 1.4%. In local currency markets there was some extreme performance: Hungarian 10yr yields fell 89bps and Mexico 10yrs dropped nearly 40bps to 9.219%. South African yields fell about 10bps to 10.863% on the 10yr while Turkish 10yrs added 18bps to 12.1%.


  • The dollar plummeted against peers on the back of the October CPI with the broad DXY index falling more than 2%, its worst single-day performance since 2009. EURUSD jumped nearly 2% to 1.0209 while USDJPY dropped to a 140 handle, falling 3.7% on the day. GBPUSD also spiked higher, up 3.1% to 1.1716. Tempering of where markets expect terminal rates to go will be behind the improvement in FX even as central bank peers of the Fed are still likely to move at a slower pace.
  • Commodity currencies also rallied sharply. USDCAD dropped by 1.5% to 1.3324 while AUDUSD rallied nearly 3% at USD 0.6619 and NZDUSD added 2.4% to 0.6025.


  • The below-expectations inflation print unleashed bullish buying on Wall Street, with all three benchmark US indices seeing major gains – the strongest one-day reaction to an inflation release in decades as expectations for a slowdown in monetary tightening rose. The growth-sensitive NASDAQ added 7.4%, while the Dow Jones (3.7%) and the S&P 500 (5.5%) also saw strong gains.
  • European markets also had a good day, as the FTSE 100, the CAC, and the DAX added 1.1%, 2.0% and 3.5% respectively.
  • The buying sentiment has continued in Asia this morning, with the Nikkei up 2.7% so far.


  • Oil prices were caught up in the broader risk-on rally following the CPI even as there has been no material change in oil markets. Brent futures added 1.1% to USD 93.67/b while WTI added about 0.8% to USD 86.47/b. China is still showing no signs of budging on its Covid-zero stance, representing the greatest barrier in the near term to oil prices pushing much higher.

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Written By

Daniel Richards Senior Economist

Edward Bell Head of Market Economics

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