Volatile Week Slowly Ends, Focus on Data Remains

Later on in the day, the September Retail Sales Report from the US Census Bureau and the October Consumer Sentiment Survey’s preliminary results from the University of Michigan will be watched by market players. Last but not least, the Fed will release its third quarter Index of Consumer Inflation Expectations.

US inflation data caused severe volatility

The US Consumer Price Index increased by 8.2% YoY in September, exceeding the 8.1% forecast, while it eased for a third straight month, according to the official announcement. On the other hand, core annual inflation rose to a new multi-year high of 6.6%. 

The announcement received a poor initial response. The greenback increased, yields shot up, and Wall Street crashed. After the opening bell, however, markets took a different turn, and the dollar closed the day down versus most of its main competitors. Stock indices skyrocketed higher, erasing 3% losses and closing 2% higher.

A 75 basis point rate increase in November and a peak policy rate of 4.85% in March 2023 are fully priced by Fed swaps. Essentially the same picture as before the CPI data, which helps to explain the recent rebound in equity prices.

Back in Europe, traders are closely watching to see if the Bank of England will continue to support the gilt market in any way, even though it has stated that its emergency bond purchases are scheduled to finish on Friday.

After weeks of turmoil in the financial markets, rumors indicate that the UK government is getting ready to drop its package of unfunded tax cuts. As a result, Finance Minister Kwasi Kwarteng ended his trip to Washington and returned to London late Thursday.