Yesterday’s positive inflation data from the US has renewed hopes for interest rate cuts; Wall Street responded with relief, and the DAX jumped to a new record, trading around 20,649 at the time of writing with the potential to target 21,189, with strong US bank earnings supporting a possible DAX rally.
The declines in inflation are particularly showing up where the shoe pinches most - in core inflation. This is a welcome relief for Wall Street optimists despite the core inflation rate remaining above the US Federal Reserve's 2% target.
Expectations of multiple Fed rate cuts had faded even before yesterday’s report; the Fed had signalled a cautious approach for 2025 before Christmas, with the latest inflation data supporting this view. With a stable labour market, caution remains necessary, but hopes for a single rate cut this year are still alive.
Nevertheless, investors should prepare for a potential scenario where interest rates remain higher for longer. The Fed typically focuses on trends rather than one-off data points, which it considers potential outliers, and while weaker core inflation may slightly reduce the expectation of higher-for-longer rates, it won’t eliminate it. However, the risk of 10-year US Treasury yields reaching 5% has significantly decreased.
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