Are markets wrong to rejoice following the recent US inflation print?

On Thursday, November 10, US stock indexes surged, the dollar slid and Treasury yields dropped. All three major US stock indexes rebounded on the day, with the S&P 500 moving up by circa 5.5%, the Nasdaq rising circa 7.4% and the Dow Jones climbing circa 3.7%.

The 10-year US Treasury fell circa 32.2 basis points, closing at 3.829%, and the two-year US Treasury was down circa 30.2 basis points, closing at 4.326%. The US dollar index plunged circa 2.1%.

The multiple big market moves were a result of what the US consumer price index (CPI) report did to the terminal rate expectations of the Federal Reserve (Fed).

The US inflation report for October stated that headline CPI rose 0.4% month-on-month, matching September’s rise and much less than the expected 0.6% month-on-month increase. Year-on-year, headline CPI for October was reported at 7.7%, compared to the September result of 8.2% and the expected 8.0%. This was the first time inflation dropped below 8.0% over the last seven months, with markets taking this as strong signs that inflation is slowing.

Almost instantly, investors lowered their expectations for the terminal rate. On the day prior to the release, expectations were...