US October CPI report showed that inflation slowed faster than expected, a welcome development for the White House and the Fed, after months of limited policy impact on consumer price inflation.

Although inflation in the US remains high, it has slowed significantly compared to the previous month. The broad consumer price index changed by 7.7% in annual terms, the market expected 7.9%. In September broad inflation amounted to 8.2%. On a monthly basis, prices rose by 0.4% against market expectations of 0.6%.

Core inflation, which excludes food, fuel and other volatile components, slowed to 6.3% YoY. In September, core inflation stood at 6.6%. This component of the CPI report is the most important for the market, since it is the core inflation that reflects the main trend in consumer demand in the economy.

Despite some signs of inflation slowing down, the general trend so far resembles a plateau with a slight decline from very high levels. For the Fed, which is trying to bring inflation under control, this behavior meant that without limiting consumer demand through a tightening monetary policy, its decline would be very slow, and therefore could have negative consequences for the economy as a whole (anchoring of high inflation expectations among consumers and subsequent rounds of inflation through the wage channel, which will become increasingly difficult to control).

Inflation in the US will remain high in 2022, but along with the release of data, there is a growing risk that its decline in 2023 may be faster than expected. Therefore, the market, despite the tough position of the Fed on this issue, may be willing to price in its U-turn in the end. Rental rate inflation could follow residential property prices, which have already begun to decline, and used car prices have also moved into decline. On the supply side, there is a recovery in supply chains, which should also put downward pressure on inflation.

The dollar index fell 1.3% below the 109 level after the report, while US index futures gained more than 3%, the Nasdaq rose by almost 4.5%. The reaction of the market shows that prices may have factored in too much Fed tightening and was subject to substantial correction in case of even a slight downside surprise. From now on market rumors will likely center on when the Fed will pause and whether it will be able to raise rates by 50 bp in December.

The breakout of a key trend line for the dollar index after a period of consolidation suggests that the market will now consider entry points for medium-term short positions: