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Shares and pound bounce back as US inflation cools

Shares and pound bounce back as US inflation cools: Markets rally on hopes Federal Reserve will put the brakes on rate hikes

Global stock markets soared and the dollar tanked after a drop in US inflation fuelled hopes of less aggressive interest rate hikes by the Federal Reserve.

As official figures showed inflation in the world’s biggest economy dropped to 7.7 per cent last month, the FTSE 100 index gained 1.1 per cent while the FTSE 250 jumped 3.9 per cent.

The rally was echoed in the US with the technology-heavy Nasdaq gaining 2.7- per cent and the S&P 500 soaring 4.7 per cent on Wall Street.

Shares boost: As US inflation dropped to 7.7% last month, the FTSE 100 index gained 1.1% while the FTSE 250 jumped 3.9%

The dollar also dived, with the pound rising more than 2 per cent towards $1.17 in its biggest one-day gain since 2017. 

Japan’s troubled yen had its best session since 2016 after being battered by the rampant greenback for much of the year. 

The fall in inflation, from 8.2 per cent in September to 7.7 per cent last month, the lowest level since January and well below June’s 9.1 per cent peak, ignited hopes the Fed will begin to slow the pace of interest rate rises in the US.

‘Inflation is still too high, but there is evidence that the Fed has turned the corner in its fight and that the pace of future interest rate increases will begin to slow,’ said Chris Rupkey, chief economist at FWD Bonds in New York.

‘The market is on fire with the long-wished for inflation moderation finally starting to appear.’

The Fed has raised rates more sharply this year than at any time since the 1980s, taking them to between 3.75 per cent and 4 per cent. 

That is the highest level since 2008. The hikes have sent the dollar soaring and stock markets tumbling as investors around the world adjust to higher borrowing costs after years of cheap money.

But the dollar has been easing in recent weeks as investors bet the Fed would soon slow down.

Lee Hardman, a currency strategist at MUFG in London, said the inflation figures ‘reinforced the sell-off in the dollar’.

US tech stocks have been particularly hard hit this year. But they bounced back yesterday with Amazon up 11.3 per cent, Microsoft higher by 6.4 per cent, Apple by 7 per cent, Facebook owner Meta soaring 10.2 per cent and Google parent Alphabet up 7.3 per cent.

In a boost to Prime Minister Rishi Sunak and his Chancellor Jeremy Hunt ahead of the Autumn Statement next week, government borrowing costs around the world also fell.

The ten-year gilt yield – a key measure of how much the Government pays to borrow – fell below 3.3 per cent having risen above 4.5 per cent in the wake of Kwasi Kwarteng’s mini-Budget in September.

The Fed is expected to raise rates by 0.5 percentage points next month and by 0.25 percentage points thereafter until a peak of 4.75 per cent to 5 per cent – lower than the 5 per cent-plus pencilled in before the inflation figures were published.

But experts warned investors not to get ahead of themselves.

Danni Hewson at broker AJ Bell said: ‘Higher prices for things like food and shelter are stubbornly sticking around, and another rise in the price to pay for fuel at the pumps will be a real kick to American motorists as well as a visible daily reminder of what’s going on with the economy.’

All of these factors may mean the Fed will not take its foot off the rate-hike pedal for some time yet, she added.

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Read more at DailyMail.co.uk