Analysis: Weaker inflation impression raises hopes of a ‘Goldilocks’ scenario for US markets

NEW YORK, Jan 12 (Reuters) – Some investors believe a slowdown in U.S. inflation last month could pave the way for a market-friendly “Goldilocks” scenario for asset prices, where the Federal Reserve is able to drive down consumer prices without too much harm to damaging growth.

U.S. consumer prices fell unexpectedly for the first time in more than 2.5 years last month, data showed on Thursday, suggesting inflation was now on a sustained downtrend even as d Other key economic indicators, such as employment, showed relatively robust growth.

Such a scenario could, in theory, strengthen the case for the US central bank to ease its market-damaging rate hikes sooner than it had expected, potentially sparing the economy from a widely anticipated recession that many expected to further hurt stock prices after last year’s sharp decline.

“Lower inflation and (the) strong job market support the Goldilocks scenario, which will certainly make the discussion of rate hikes at the heart of the FOMC (Federal Open Market Committee),” said said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.

Of course, the Fed has given little indication that it is about to deviate from the rate path charted by policymakers last year, in which they expected their key rate to cap between 5.00% and 5.25% this year, against a current rate of 4.25% to 4.50%.

Market prices indicate that investors remain committed to a more dovish view, with the policy rate peaking below 5% around mid-June before falling in the second half of the year.


For the near-term outlook, however, Thursday’s data supported expectations that the Fed would slow the pace of its rate hikes again at its Jan. 31-Feb. 31 meeting. 1 political meeting.

Investors are now pricing in a roughly 90% chance that the central bank will raise its policy rate by 25 basis points to a range of 4.50% to 4.75% at this meeting, up from a roughly 75 percent chance. % forecast on Wednesday and the 35% chance expected a month ago, according to CME Group’s FedWatch tool. The Fed raised rates by three-quarters of a percentage point in four straight meetings starting in June 2022 before slowing to a half-percentage-point increase at its meeting last month.

“In my opinion, this is exactly what we wanted, not too hot or too cold, a Goldilocks figure that will set us up for a much better year this year,” said Phil Blancato, Managing Director of Ladenburg Thalmann. Asset Management.

Meanwhile, stock moves have been subdued so far on Thursday compared to previous consumer price data release dates, often a flashpoint for large market swings in recent months. The S&P 500 Index (.SPX) recently rose around 0.6%, while yields on the benchmark 10-year Treasury fell around 11 basis points to around 3.44%.

In contrast, the S&P 500 has moved an average of 2.7% in either direction over the previous seven CPI releases, compared to an average daily move of around 1.2% over the same period.

Investors in options markets were expecting a similar development on Thursday, with short-term options pricing a move of around 2% entering the CPI print, according to data from market maker Optiver.

“This was the first online CPI print in a long time and the first print in six months where it was unprofitable to be ‘long volatility’,” said Hugo Bernaldo, senior cross-asset trader. at market maker Optiver in Amsterdam. . “That might cause the market to rethink them in the future.”

The more than 3% rise in stocks since the start of the month may also have contributed to Thursday’s subdued reaction, said Charlie McElligott, equity derivatives strategist at Nomura.

“It was a bullish story, but we traded it in anticipation…and it squeezed the actual trade after the event,” McElligott said.

“There were a number of discretionary, macro and tactical people who had this type of Goldilocks disinflation risk to start the year,” he said.

Tiffany Wilding, North American economist at PIMCO, estimates that the Fed should only raise rates twice this year before pausing.

They “have to still keep the policy at restrictive levels, but in terms of the likelihood of having to go much higher from here, I think it’s definitely going down day by day as we get more and more good news on inflation data,” she told me.

Reporting by David Randall and Saqib Iqbal Ahmed; Additional reporting by Davide Barbuscia and Lewis Krauskopf; Editing by Ira Iosebashvili and Paul Simao

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