US inflation fell more than expected to 3.2 per cent in October, the first decline in four months, prompting Treasury yields to fall sharply and Wall Street stocks to climb.
Tuesday’s consumer price data compares with a 3.7 per cent rise in the 12 months to September.
The 3.2 per cent year-on-year figure was also marginally below expectations of 3.3 per cent. The yield on the rate-sensitive two-year Treasury, which moves inversely to prices, was down 0.2 percentage points at 4.84 per cent in lunchtime trading in New York.
The yield on the benchmark 10-year Treasury dropped to a three-month low of 4.43 per cent before retracing some of that move to be down 0.17 percentage points at 4.47 per cent. The S&P 500 was up 1.9 per cent, keeping the benchmark index on course for one of its biggest one-day jumps this year.
The Nasdaq Composite was up 2.2 per cent. The dollar was 1.4 per cent weaker against a basket of six other major currencies.
The Fed held its benchmark interest rate steady at a 22-year high earlier this month. After Tuesday’s report, futures markets were pricing in just a 1 per cent chance that the central bank would lift rates at its next policy meeting in December.
Investors also brought forward their estimates of when the Fed would start cutting rates, with investors pricing in two 0.25 percentage point cuts by July.
The strong market reaction was encouraged by slightly weaker than expected core inflation, which strips out volatile food and energy prices. Core inflation dipped from 4.1 per cent to 4 per cent on a year-on-year basis, and rose 0.2 per cent month on month.