Increased investor optimism that the peak of inflation in the US may have passed and the Fed will continue to tighten monetary policy with an interest rate hike of less than 75 bp. decided at the last four meetings, the data on producer prices in the industry, published a few days after the positive surprise caused by the data on inflation, also turned out to be weaker than expected. The general price index rose 0.2% m/m in October from an average estimate of 0.4%, with the annual rate of change of the index falling from 8.4% in September to 8%, the lowest level from July 2021.

The Structural Index also showed signs of slowing down, unchanged on a monthly basis, while the market expected a 0.3% increase, with the annual rate of change falling to 6.7% from 7.1%, reflecting the relative easing of global supply chain disruptions. supply and reduced demand due to higher interest rates.

Although the Fed is expected to soften the size of the rate hike to 50 bp. at the next meeting on December 13-14, the rate hike cycle may turn out to be longer, and the ceiling level of the key intervention rate will be higher than expected. It can be argued that the momentum of the US economy remains relatively strong, despite the general increase in interest rates by 375 basis points. since March, while the labor market continues to show signs of tension. At the same time, as inflation remains well above the Fed’s target, spillover concerns remain strong, with recent related polls from the New York Fed and the University of Michigan suggesting further strengthening of inflation expectations.

The prospect of a higher-than-expected terminal intervention rate was reinforced last week by comments from the head of the St. Louis Fed. Louis James Bullard, according to which the Fed should raise interest rates to a fairly “restrictive” level, at least in the range of 5% -5.25%. As a result of the above, futures are once again priced in for the first time since inflation data was released last week, with the cap for the federal funds rate above 5% in 2023, while the anticipated rate cut in the second half of the year is capped at around 40m. in.

* Department of Financial Analysis and Research of International Capital Markets of Eurobank.