Dollar Reacts to Inflation Report, S&P 500 Surges, but Initial Claims Data Sparks Concerns about US Labor Market

The dollar sharply declined after the inflation report, which indicated a significant slowdown in the growth of prices in two key components: the service sector and rental rates. The monthly growth rate fell from 0.6% to 0.3%, providing hope for a subsequent inflation deceleration (due to the inertia of these components):However, on Wednesday, the dollar partially recovered from Tuesday's drop following the release of the US retail sales report, which showed that consumer spending in October exceeded expectations. Core retail sales, excluding volatile components, increased by 0.1% compared to the previous month's forecast of 0%. The impact of the data was particularly strong in light of inflation weakening, which had led market participants to anticipate a decline in consumer spending, which, as it turns out, did not materialize. The Producer Price Index, also released on Wednesday, showed monthly deflation, marking the third most important evidence this week that the chances of a "soft landing" for the US economy (inflation mitigation without a recession) have significantly increased. A favorable combination of economic growth and inflation indicators led to the S&P 500 opening with a strong upward gap yesterday, breaking through 4500 and closing above this round level. Overall, this suggests a consensus among investors that the 4500 area, in light of new positive data, is considered a fair equilibrium assessment of the American market.In turn, US money markets, which serve as proxies for investors' short-term expectations of monetary policy, have completely ruled out the chances of a rate hike in December and have also started to factor in a 90-basis-point rate cut in 2024. This is the current probability distribution of the interest rate level by the end of next year:Treasury bond yields continued to decline today after the release of data on unemployment benefit claims. Initial claims unexpectedly jumped to 231K, with a forecast of 217K, indicating a sharp acceleration of layoffs in the economy. Continuing claims also rose from 1834K to 1865K. It is worth noting that the rapid rise in initial claims has been observed since early October and indicates a fairly pronounced weakening of the labor market in the US. Against this backdrop, investors may well begin to factor in an increase in the risks of an economic recession, so the surge in market optimism after inflation should be approached with caution:Data on the Chinese economy released on Wednesday surprised on the upside. Industrial production and retail sales in October exceeded expectations in year-on-year terms; unemployment remained unchanged compared to the previous month at 5%. The growth of China's industrial production correlates with the growth of the global economy, so the data became another favorable signal for external markets, reinforcing the risk appetite and further fueling the yield-seeking trend: