Yesterday USA consumer price index came at 8.5% on yearly basis and this resulted in equities reacting positively by moving up by 2%. For those wondering why has this been taken positively? There is a clear answer that month on month basis the inflation was 0% and it was after October 2020 that this level was seen.
The inflation was largely driven down by energy prices that saw a federal tax adjustment and also crude oil price reduction. The negative impact of energy prices negated the rises in services and food that were the largest increases.
This immediately resulted in the interest swap rate market reducing the odds of a 75bps increase in the September meeting and adjusting the future rate curve to peak sooner. On the same day, US 10year bond auction received the most positive response since February 2021.
But does this mean that we are past inflation worry? From the perspective of the Federal Reserve, it is not. There is still a consensus that more needs to be done and it will be done until inflation comes to the 2% band. This is in addition to many risks that are still present in the economic environment that may also get active during the winter months.
It does seem to be the peak of the optimistic view of swap rates that will be starting to get volatile from October onwards or earlier. This might lead to the next leg of downfall in the market and realising that it is a long journey. Though it is much-needed relief for the market and investors it is not the time to be complacent.