A shopper holds a shopping basket with groceries
US annual consumer price growth slowed to 7.7% in October © David Paul Morris/Bloomberg

US stocks had their biggest weekly rise in months and the dollar declined after cooler than expected inflation data released on Thursday fuelled speculation that the Federal Reserve would slow the pace of interest rate tightening later this year.

Wall Street’s benchmark S&P 500 added 5.9 per cent over the week, the largest increase since June. It gained 0.9 per cent on Friday, following its best day in two-and-a-half years on Thursday, when it jumped 5.5 per cent. The tech-heavy Nasdaq Composite rose by the most since March, increasing 8.1 per cent for the week, driven by a 7.4 per cent rise on Thursday and a 1.9 per cent gain on Friday.

The dollar index is up 10.8 per cent this year but slipped on Friday as investors dialled back expectations for further aggressive interest rate rises in the US. The dollar fell 1.7 per cent on the day against a basket of six peers, extending a decline since a peak in late September.

“The dollar peak might be past us, but a dollar downtrend may not be there yet,” said Francesco Pesole, FX strategist at ING. Fears of a global recession next year could yet see investors return to what is widely regarded as a safe haven asset in times of economic uncertainty, Pesole continued.

The moves came after data on Thursday that showed the annual rise in the US consumer price index came in at 7.7 per cent in October, the smallest 12-month increase since January and down from an annual rate of 8.2 per cent in September.

Markets are now betting there is a roughly 70 per cent chance the Fed will raise its benchmark interest rate by 0.5 percentage points when it meets in December, breaking a run of four consecutive 0.75 percentage point rises.

Line chart of S&P 500  showing US stocks soar as inflation cools

But analysts cautioned that some investors may be getting ahead of themselves.

“It is still far too early to declare the inflation threat over,” said Mark Haefele, chief investment officer at UBS Global Wealth Management, who thinks the Fed will raise borrowing costs by a further percentage point before it pauses its “rate-hiking cycle”.

Emmanuel Cau, head of European equity strategy at Barclays, warned that core CPI numbers remain “way too high” for central banks to consider easing financial conditions. “Lower inflation is a step in the right direction but the pace of disinflation is yet to be seen,” Cau said.

US government bond markets, which are closed on Friday for Veterans Day, had rallied strongly immediately after Thursday’s CPI release. The yield on two-year US Treasuries fell 0.29 percentage points to 4.33 per cent, its largest daily drop in more than a decade. The yield on the benchmark 10-year Treasury note dropped 0.33 percentage points to 3.81 per cent, down from a peak of 4.25 per cent in October. Yields fall as prices rise.

In Europe, the regional Stoxx 600 was mostly flat as the European Commission predicted a sharp contraction in German output in the months ahead. London’s FTSE 100 fell 0.8 per cent, erasing earlier gains, after UK gross domestic product fell 0.6 per cent between August and September — a larger drop than the 0.4 per cent forecast by economists.

Meanwhile, Asian equities ticked higher, following indices in the US. Hong Kong’s Hang Seng index shot up 7.7 per cent, South Korea’s Kospi increased 3.4 per cent and China’s CSI 300 rose 2.8 per cent.

Additional reporting by Harry Dempsey in London

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