Last week USA inflation-related data releases provided another round of relief as actual data was lower than estimates. In the last year, CPI has reduced from 8.2% to 3.24% all thanks to commodity prices softening their rise and falling afterwards.
These releases led to positive reactions in Fed Rate Swap markets as the probability of the first-rate cut moved from June 2024 to May 2024 with a 30% odds of a rate cut in March. This resulted in a 5% drop in 10-year Bond yield with a total of 8.35% drop from the peak.
The equity markets also resulted in a positive move as the S&P 500 moved up by 2.24% with a total of 9.4% rise in the last three weeks. Though the market and participants are counting on the optimism of inflation. The Fed members are still unsure of whether they are peak rates and how they will be here.
This caution is justified as the conflict in the Middle East is on the rise with a high level of uncertainty ahead. Along with it, El Niño is already impacting food production levels with a major impact yet to come.
Within such an environment of uncertainty, a rate cut would lead to an even more volatile future in case such external factors lead to inflation reversal next year.
Thus the question arise, are we close to peak optimism relating to interest rates falling? For this to be answered the next three months will be crucial.