Softer US inflation, drop in yields prop up domestic markets

Equity markets rallied after softer-than-expected inflation data in the US and UK rekindled hopes of the end of the rate-hiking cycle by major central banks.

The soft inflation reading drove down bond yields and the US dollar, whetting the appetite for risky assets.

The 10-year US bond yield fell below 4.5 per cent after topping 5 per cent less than a month ago.

The S&P BSE Sensex rose 742 points, or 1.14 per cent, to end the session at 65,676. The National Stock Exchange Nifty ended the session at 19,675, gaining 232 points, or 1.2 per cent.

This marks the highest close for both indices in almost a month.

Wednesday’s gain was the biggest single-day gain for the Sensex since June 30 and since March 31 for the Nifty.

US inflation slowed in October.

The core consumer price index, excluding food and energy costs, rose 0.2 per cent from September.

Equity investors in the US cheered it as a sign of the end of the rate hike by the US Federal Reserve (Fed), with some betting on a 50-basis point cut by July next year.

Similarly, inflation fell to its lowest in the UK in two years.

Consumer prices rose 4.6 per cent from a year earlier in October, down from 6.7 per cent in the previous month, the slowest pace since 2021 as energy prices fell.

The softer inflation numbers led to speculation that Bank of England would cut rates as early as the middle of next year.

Asian equities received a further boost as China stepped up support to boost its economy.

People’s Bank of China offered the banking system 1.45 trillion yuan of cash through its medium-term lending facility.

The reports of nine Indian stocks included in the Morgan Stanley Capital International global index further lifted sentiment back home.

Market experts said the strong earnings momentum and growth expectations will help Indian equities hit new highs before the end of the year.

“Overall, we think the recent relief rally in Asian stocks has got yet another extension.

"While we had earlier argued that a new breakout rally for stocks appeared unlikely at that stage, we now think it is not a foregone conclusion.

"This is because of Fed Chair Jerome Powell’s recent dovish pivot, while the most recent US labour market and inflation reports suggest an economy that is softening (but not collapsing), and bond yields and oil prices have moderated, thus reducing hard-landing risks in 2024,” said Chetan Seth, Asia ex-Japan equity strategist at Nomura.

Overseas funds turned net buyers.

They bought shares worth Rs 550 crore, and domestic investors were also net buyers worth Rs 610 crore, according to provisional data.

“The softer-than-anticipated US and UK inflation data highlights the optimism for an end to the interest rate cycle, as evidenced by the ease in bond yields.

"This is likely to draw foreign portfolio investor flows into emerging markets, which is good for India considering the current better earnings season and the festival demand pick-up,” said Vinod Nair, head of research at Geojit Financial Services.

Despite the upbeat mood in the market, some experts warned that the cooling inflation is just a start, and there must be at least a few softer inflation readings before one can conclude that rate hikes are likely to end.

Going forward, investors will keenly watch macroeconomic numbers from the US and China, statements of monetary policy officials, and the meeting between US President Joe Biden and his Chinese counterpart Xi Jinping.

The market breadth was strong with 2,215 stocks advancing and 1,538 declining.

Except three, all the Sensex stocks advanced.

Reliance Industries rose 1.8 per cent and contributed the most to Sensex gains.

Shares of Bajaj Finance fell nearly 2 per cent, the most among Sensex and Nifty components.