Markets have posted a slight rally after inflation came in lower than analyst expectations even as a debt crisis looms.

On Wednesday, the U.S. Bureau of Labor Statistics released the year-on-year CPI readings for April, where a rise of 4.9% came in marginally lower than economists’ expectations of 5.0%. Meanwhile, month-on-month core CPI came in at 0.4%, in line with expectations. The takeaway from all this? It looks like some indication that the Fed’s aggressive hiking regime seems to be working. 4.9% is the lowest rate in two years, giving the markets further hope that the Fed might be pausing or even reversing its interest rate increases soon. 

Risk appetites have been boosted at the news, with U.S. equities rising. The S&P 500 rose 0.8% while the Nasdaq leapt 1.1%. Yields dipped, while the dollar moved lower.

Meanwhile, oil has consolidated just below 73 as a weaker dollar and strong demand in Asia propped up the commodity weighed down by a much higher than expected build in US oil inventories, where there was 2.951 million barrel increase, against expectations of a draw of 0.914m. 

Post-Market

Even with evidence of moderating influence, markets are still understandably cautious with core inflation still remaining at 5.5% and that a CPI of 4.9% – while lower than expectations – is a far way off from the Fed’s 2% target. 

Last week’s April NFP reading, meanwhile, indicated an increase of 253K and above expectations, a sign that the labour market remains stubbornly strong even though March’s figure dipped slightly below forecasts.

Then there’s the fact that even with a pause in rate hikes, the Fed Fund rates still remain at a high of 5.00% to 5.25%.

Part of the caution also stems from the looming debt crisis in the US, where analysts say that the US could hit its default as early as 1 June up until early August. Pure economics has taken a backseat to politics as talks about whether to raise the debt ceiling are still going on with no end in sight. An unprecedented default will be disastrous for the US economy. 

In addition to keeping a lookout for Friday’s US Initial Jobless Claims and PPI data, both released at 15:30 on 11 May, investors are also advised to keep a close watch on the development of the debt situation in the US. 

As a  friendly reminder, do keep an eye on market changes, control your positions, and manage your risk well.